Exam 1 Problems for Previous Version - Financial Markets | ECON 423, Assignments of Financial Market

Download Exam 1 Problems for Previous Version - Financial Markets | ECON 423 and more Assignments Financial Market in PDF only on Docsity! Econ 423: Essays/Problems from Previous Versions of Exam 1 Spring 2007 1. Explain how the neoclassical macroeconomic model generates the possibility that a government budget deficit or surplus can indirectly affect the rates of inflation or deflation. 2. How are the supplies and demands for loanable funds affected by: (a) government deficits or surpluses? (b) increases in the Dow-Jones index? (c) expectations of a boom, or of recession? (d) expectations about inflation? 3. Describe Frank Knight’s distinction between risk and uncertainty, and discuss why he did not view risk as an explanation for an entrepreneur’s profits. 4. List the functions of money per standard theory today, and identify which functions were not understood by neoclassical monetary theorists prior to roughly 1930. 5. Distinguish the various motives for holding money identified by John Maynard Keynes from the motives accepted by neoclassical monetary theorists prior to roughly 1930. Fall 2006 1. Show how the absorption equation can be derived from a standard equation that could be used to calculate gross domestic product (GDP) or national income. (15 points) 2. Explain why a structural deficit or surplus is a better indication than the current or cyclical budget deficit of surplus of the thrust of fiscal policy. (30 points). Fall 2005 1. Briefly describe two theories explaining why broad classes of financial assets might, at times, experience “bubbles” in which their values either significantly exceed or are significantly less that the values derived from reasonably conservative present value formulas. [40 points] 2. A simple present value formula contains four “basic” variables. Legibly write the present value formula in the space below, and then provide plausible examples of financial circumstances in which each of these variables is “the unknown” that must be solved. [40 points] 3. Assume that the economic environment of September 2005 exists before the occurrence of the events specified in the left column. Write “UP”, “DOWN”, “INDETERMINATE”, or “ZERO” to identify how Demand, Supply, and interest rates in the bond market would be most likely to be affected by the changes in the economic environment specified in the left column of this table. Five points are possible for each line you choose to answer this way, and five points for each clear and legible and plausible explanation. Event Demand for Bonds Supply of Bonds Interest Rate (a) Aircraft carriers stationed in Florida are devastated by a terrorist attack on December 7, 2005 that rivals the attack on Pearl Harbor in 1941. (a’) Explanation for the change in the supply of bonds? 1 (b) Congress rejects a presidential veto and restores the inheritance and income tax structures to the rates that prevailed in 2000. (b’) Explanation? (c) Social Security Taxes are increased to ensure the solvency of the system. (c’) Explanation? (d) China liquidates its holding of U.S. Treasury bonds and buys U.S. oil companies with the funds it has acquired consequent to the U.S. Trade Deficit. (d’) Explanation Summer 2005 3. Explain why corporate balance sheets and income statements may be poor guides to the net present value [market capitalization] of a company. 4. What are some fundamental reasons why providing managers with simple stock options may not fully resolve agency problems? How can the interests of managers and stockholders be made more congruent? Spring 2005 1. Identify at least four types of risk that cause rates of return/interest rates on financial assets to differ, and briefly distinguish/define (one line?) these types of risk. (40 points) 2. Explain why Milton Friedman’s monetary growth rule is logically inconsistent in the long run with his advocacy of a Constitutional amendment requiring the federal budget to be balanced annually. (40 points.) 2