Professional Documents
Culture Documents
KEY
Name
_______________________
1) In the United States the quantity demanded of loanable funds (in Billions of Dollars) is
QdUS=8010 i , and the quantity supplied of loanable funds is QsUS=10 i10 . In the
a) (15points) If capital is free to flow between the countries, the equilibrium quantity of
48.75 will equal _____________ billion dollars, with excess
loanable funds exchanged worldwide
demand for domestic loanable funds equal to ____________ billion dollars Lender
-15.0 in the United
States. The United States is a _____________________ in the global loanable funds market.
Show all work.
s s s
QWorld =Q US +QROW =10i 10+5i20=15 i30
b) (5 points) Suppose saving in the U.S. decreases by 20 billion dollars. The world
5.75 rate will then equal ________, and excess demand for 5.0
interest loanable funds in the ROW
will equal _________ billion dollars. Show all work.
s S
We now have QUS=10 i1020=10 i30QWorld =15 i3020=15 i50
230
QdWorld =18025 i=15 i50=QsWorld i= =5.75
40
Coupon Coupon
i Current= > =iCoupon
P Bond Par
When we consider the yield to maturity we note that the bond holder
receives the current yield each period PLUS a capital gain when the bond
matures because he/she receives a Par payment in excess of the price paid for
the bond. Hence, iYTM > iCurrent.
3. (5 points) What is the difference between a Subprime Mortgage versus an Alt-a Mortgage?
A Subprime Mortgage is one for which the borrower has a poor credit rating.
4. (5 points) A money may serve as a medium of exchange only if it is also a store of value.
Is this statement true or false? Explain.
TRUE!
If the money is NOT a store of value, it will NOT be readily accepted in exchange
for goods and services. Hence it cannot be a medium of exchange.
5. (10 points) Real GDP in the United States was 15,604.3 Billion (2009) dollars in 2013. The
GDP Deflator for 2013 was 106.5. The M2 money supply in 2013 was 10,740.2 billion
dollars. We can determine1.55
from this data that the velocity of M2 money was ___________in
2013. Show all work.
Nominal GDP
GDP Deflator= 100
Real GDP
M V =10,740.2 V =16,618.58=P Y
16,618.58
V= =1.55
6. 10,740.2
(5 points) Harry pays $50,000 for an annuity which pays him X dollars at the end of each
3,600
year in perpetuity. The annual interest yield is 7.2 percent. We can determine that X =
________________ dollars. Show all work.
X X
50,000= t
= X=0.072 ( 50,000 )=3,600
t =1 (1+ 0.72) 0.072
7. (10 points) Suppose the government raises both personal and corporate income taxes.
Illustrate the impact of this policy on the bond market and explain how bond prices and
yields would be affected.
PBond S
S An increase in the personal income
tax reduces households disposable
income and saving. The demand for
P0
Bonds falls.
Capital Interest
Prob(it+1) it+1 Gain Return = 2.71 + 3.97
(Percent) (Percent) (Percent)
0.30 3.80 2.71 6.68
0.60 4.00 -0.74 3.23
0.10 4.20 -4.04 - 0.07
= 3.23 3.97
a) (20 points) Complete this table. Show your work below for computing the interest
return if it+1 = 4.20 percent
4,000 1 100,000
PBond ,t +1= ( 0.0420 )(1 (1+0.0420) ) (1+ 0.420)
+
29 29
=96,682.26
4,000 96,682.26100,750
Interest Return= + =0.03970.0404=0.0007
100,750 100,750
b) (5 points) Given the distribution of future interest rates i t+1, we can determine that your
3.93 strategy equals ___________. You face
expected annual interest return for this investment
a standard deviation of2.04
return (a measure of risk) equal to __________. Show all work.
PV = ( Ci )[ 1 ( 1+1i) ]
n