bkmsol-ch17-9e corrected 7.29.2010

bkmsol-ch17-9e corrected 7.29.2010 - CHAPTER 17...

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PROBLEM SETS 1. Expansionary (looser) monetary policy to lower interest rates would stimulate both investment and expenditures on consumer durables. Expansionary fiscal policy (i.e., lower taxes, increased government spending, increased welfare transfers) would stimulate aggregate demand directly. 2. A depreciating dollar makes imported cars more expensive and American cars less expensive to foreign consumers. This should benefit the U.S. auto industry. 3. This exercise is left to the student; answers will vary. 4. A top-down approach to security valuation begins with an analysis of the global and domestic economy. Analysts who follow a top-down approach then narrow their attention to an industry or sector likely to perform well, given the expected performance of the broader economy. Finally, the analysis focuses on specific companies within an industry or sector that has been identified as likely to perform well. A bottom-up approach typically emphasizes fundamental analysis of individual company stocks, and is largely based on the belief that undervalued stocks will perform well regardless of the prospects for the industry or the broader economy. The major advantage of the top-down approach is that it provides a structured approach to incorporating the impact of economic and financial variables, at every level, into analysis of a company’s stock. One would expect, for example, that prospects for a particular industry are highly dependent on broader economic variables. Similarly, the performance of an individual company’s stock is likely to be greatly affected by the prospects for the industry in which the company operates. 5. Firms with greater sensitivity to business cycles are in industries that produce durable consumer goods or capital goods. Consumers of durable goods (e.g., automobiles, major appliances) are more likely to purchase these products during an economic expansion, but can often postpone purchases during a recession. Business purchases of capital goods (e.g., purchases of manufacturing equipment by firms that produce their own products) decline during a recession because demand for the firms’ end products declines during a recession. 17-1
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6. a.Gold Mining . Gold traditionally is viewed as a hedge against inflation. Expansionary monetary policy may lead to increased inflation, and thus could enhance the value of gold mining stocks. b. Construction . Expansionary monetary policy will lead to lower interest rates which ought to stimulate housing demand. The construction industry should benefit. 7. Supply-side economists believe that a reduction in income tax rates will make workers more willing to work at current or even slightly lower (gross-of-tax) wages. Such an effect ought to mitigate cost pressures on the inflation rate. 8.
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bkmsol-ch17-9e corrected 7.29.2010 - CHAPTER 17...

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