ans_pbset2

ans_pbset2 - ECON110B Summer Session II 2007 Professor Dong...

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1 ECON110B Summer Session II 2007 Professor Dong Heon Kim Answer key Problem Set #2 1. The yield is approximately the average of the short term interest rates over the life of the bond (Expectations hypothesis). a) 5% b) % 25 . 5 %) 5 . 5 % 5 ( 2 1 2 = + = t i c) % 5 . 5 %) 6 % 5 . 5 % 5 ( 3 1 3 = + + = t i d) Yield curve yield to maturity 5.5% 5.25% 5% 1Y 2Y 3Y Maturity 2. An inverted yield curve implies by the Expectations hypothesis that the expected future interest rate is lower than the current interest rate. These expectations could arise from a belief that the IS curve will shift to the left in the future (and output will fall, like recession), say because the consumer confidence in the future economy falls or future investment is expected to fall or both. 3. a) Human wealth = the present value of expected after-tax labor income over her working time = (1 – 0.25)\$40,000 + (1 – 0.25)\$40,000 (1 + 0.05) + (1 – 0.25)\$40,000 (1 + 0.05) 2 = (1 – 0.25)\$40,000[1 + (1 + 0.05) + (1 + 0.05)

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This note was uploaded on 09/18/2008 for the course ECON 100B taught by Professor Rauch during the Winter '07 term at UCSD.

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ans_pbset2 - ECON110B Summer Session II 2007 Professor Dong...

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