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Unformatted text preview: 1-What does it mean to say that financial markets are efficient? What does it mean for your own eventual personal financial planning? Explain the relationship between the price of a typical bond and a price of a typical stock. Explain why that relationship exists.Efficient financial Markets are markets that adjust quickly to new information- current price reflects all that is known about economic conditions present and futureI n this type of market it is difficult to make anything above and beyond opportunity cost and the above normal rate of return1 thing you can do for your own personal financial planning is to diversify portfolio- diversification minimizes risk while keeping the rate of return at a normal ratethe relationship between bonds and stocks is proportional because the changes are affected by the same thingsobonds affected by- changes in r isk, changes in interest ratesostock prices affected by- changes in r isk, profits, expectations, opportunity cost (interest rate)when the price of alternatives fall, bonds and stocks increases because they are deemed more valuable2- Using the idea of diminishing marginal utility, argue for a regressive or progressive tax. / Why does diminishing marginal utility appeal more to a progressive or regressive tax system?A progressive tax system is typically more fair then a regressive tax system because they have more income to pay beyond the basic necessities A regressive tax system is not as fair but is more efficient, because people will be discouraged to increase their work as the incentives of work have decreased in a progressive systemI n this example, the idea of diminishing marginal utility refers to the fairness of the systemAs income increases, diminishing marginal utility applies to incomeThe additional dollars of income become less valuable to higher income individuals, and they are sacrificing less with the higher marginal rates of tax than someone earning lessthe marginal utility of another dollar of income will decease, the fairer the taxtake same utility away from everyoneoTherefore take larger percentage from higher earning incomes because their marginal utility of that dollar is less3-Two goods are similar: explain all the reasons there could be a price...
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This note was uploaded on 02/02/2010 for the course ECON 101 taught by Professor Buckles during the Spring '08 term at Vanderbilt.
- Spring '08