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| The following rates currently exist: Spot $1.000/euro. Annual interest rate on 180-day euro-denominated bonds: 3%. Annual interest rate on 180-day U.S. dollar-denominated bonds: 4%. Investors currently expect the spot to be about $1.005/euro in 180 days. a. Show that uncovered interest parity holds (approximately) at these rates. b. What is likely to be the effect on the spot if the interest rate on 180-day dollar-denominated bonds declines to 3 percent? If the euro interest rate and the expected future spot rate are unchanged, and if uncovered interest parity is reestablished, what will the new current spot be? Has the dollar appreciated or depreciated? |
The following rates currently exist: Spot exchange rate: $1.000/euro. Annual interest
The Fisher equation relates real interest rates to nominal interest
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| The Fisher equation relates real interest rates to nominal interest rates. Let rt, be the real interest rate, i, the nominal interest rate, and ?et the expected rate of inflation. The Fisher equation states that rt, = i – ?et. Because expected inflation is not observable today, we will use the realized inflation. Download the U.S. CPI and construct the inflation series. Is inflation stationary? Download the U.S. 3-month Treasury bill rates. Is the Treasury Bill rate stationary? Construct the difference rt,= i – ?et. Is it stationary? Is it a cointgrating relation? |
Many people are concerned that production of petroleum has peaked;
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| Many people are concerned that production of petroleum has peaked; people will have less petroleum available to them from now on. (a) If everyone has perfect knowledge of world petroleum and production has indeed peaked, what do you expect to happen to the price of petroleum over time, if demand stays constant or increases? (b) How do you expect people to respond to the price trend you identified in (a)? Will this response make future oil scarcities more or less of a problem? (c) In fact, people do not have perfect knowledge of world petroleum It is possible that more oil exists than is currently known; it is also possible that some known may not be developed, due to costs or environmental problems. How might these uncertainties affect the responses you discussed in (b)? |
Suppose the demand and supply for milk are described by
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| Suppose the demand and supply for milk are described by the following equations: QD = 600 – 100 P; Qs = -150 + 150P, where P is price in dollars, Q,, is quantity demanded in millions of gallons per year, and Qs is quantity supplied in millions to gallons per year. a. Create demand and supply tables corresponding to these equations. b. Graph supply and demand and determine equilibrium price and quantity. c. Confirm your answer to b by solving the equations mathematically. |
Suppose GDI’ is $1000 billion, the national debt last year
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| Suppose GDI’ is $1000 billion, the national debt last year was $500 billion, the interest rate paid on government debt is 7%, and GDP is growing by 5% per year. a. If the goal of the government is to hold the debt-GDP ratio constant, what must the size of the primary surplus be? What is the size of the total budget surplus in this case? b. If the interest rate paid on government debt were 5% and the growth rate of GDP were 7%, what would the primary surplus need to be to maintain a constant debt-GDP ratio? What is the size of the total budget surplus in this case? |
Determine whether each of the following is an example of
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| Determine whether each of the following is an example of a direct expenditure offset to fiscal policy. a. In an effort to rejuvenate the nation’s railroad system, a new government agency buys unused track, locomotives, and passenger and freight cars, many of which private companies would otherwise have purchased and put into regular use. b. The government increases its expenditures without raising taxes. To cover the resulting budget deficit, it borrows more funds from the private sector, thereby pushing up the market interest rate and discouraging private planned investment spending. c. The government finances the construction of a classical music museum that otherwise would never have received private funding. |
Table 217 of the 2006 U.S. Statistical Abstract shows that,
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| Table 217 of the 2006 U.S. Statistical Abstract shows that, among all 25-34 year-olds, the average annual earnings of a high school graduate with no further education was $26,073 while the average annual earnings of a college graduate with no further education was $43,794 is 2003. (a) Assuming college requires five years, show that the annual return to each year of college education averages 10.9%. (b) It is typically thought that this type of calculation of the returns to schooling is biased, because it doesn’t take into account innate ability (i.e., ability in the workplace not due to college) or innate motivation. If this criticism is true, is the actual return to each year of a college education more than or less than 10.9%? |
Kalamazoo Competition-Free Concrete (KCC) is a local monopolist of ready-mix
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| Kalamazoo Competition-Free Concrete (KCC) is a local monopolist of ready-mix concrete. Its annual demand function is Qd = 16,000 – 2P, has variable costs of VC = 20Q + 0.0025Q2, marginal costs of MC = 20 + 0.0025Q and no fixed costs. Suppose that the government wants to regulate Kalamazoo Competition-Free Concrete. To do so, regulators institute a price ceiling that sets the maximum price KCC can charge. What price will KCC charge if the price ceiling is set between $56 (the monopoly price) and $40 (the price if KCC acts as a price taker)? Specifically, suppose the price ceiling is below $40. |
The Cherry Manufacturing Company’s chief engineer examines a random sample
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| a. Does the relationship between these two variables seem to be direct or inverse? Does this accord with common sense? Why or why not? Does the relationship seem to be linear? b. Calculate the least- squares regression of shear strength on weld diameter. c. Plot the regression line. Use this regression line to predict the average shear strength of a weld 1/5 inch in diameter. Use the regression line to predict the average shear strength of a weld 1/4 inch in diameter. |
Congratulations again. You’ve just been appointed economic adviser to Examland.
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| Congratulations again. You’ve just been appointed economic adviser to Examland. The mpe is .6; autonomous investment is $1,000; autonomous government spending is $8,000; autonomous consumption is $10,000; and autonomous net exports are $1,000. a. What is the equilibrium level of income in the country? b. Autonomous net exports increase by $2,000. What will happen to income? c. What will happen to unemployment? (Remember Okun’s rule of thumb.) d. You’ve just learned the mpe changed from .6 to .5. How will this information change your answers in a, b, andc? |
