Spring 2009 Midterm Exam Part 2

Spring 2009 Midterm Exam Part 2 - Department of Economics...

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Department of Economics University of Maryland Economics 325 Intermediate Macroeconomic Analysis Midterm Exam – Part 2 Professor Sanjay Chugh Spring 2009 March 11, 2009 NAME: TA’S NAME: Part 2 of the Exam has a total of two (2) problems and pages numbered one (1) through six (6). Each problem’s total number of points is shown below. Your solutions should consist of some appropriate combination of mathematical analysis, graphical analysis, logical analysis, and economic intuition, but in no case do solutions need to be exceptionally long. Your solutions should get straight to the point – solutions with irrelevant discussions and derivations will be penalized. You are to answer all questions in the spaces provided You may use one page (double-sided) of notes. You may not use a calculator. Problem 3 / 20 Problem 4 / 30 TOTAL PART 2 / 50
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1 Problem 3: Mortgage-Backed Securities and Stock Prices (20 points). Much of the recent problems in financial markets have stemmed from a particular type of stock called “mortgage backed securities” (abbreviated MBS). Briefly, an MBS is a type of stock that indirectly entitles holders of that stock to the mortgage payments made by a great many homeowners to their respective mortgage companies. Suppose there are two “types” of stock: MBS stock and “regular stock” (i.e., “regular stock” is all stock besides those that are specifically MBS stock). In the context of the infinite-period framework, denote by 1 REG t a ! the representative consumer’s holdings of regular stock at the beginning of period t and by 1 MBS t a ! the representative consumer’s holdings of MBS stock at the beginning of period t. The nominal prices of the two different types of stock are, during period t , REG t S and MBS t S . The nominal dividend payments of the two different types of stock are, during period t , REG t D and MBS t D .
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Spring 2009 Midterm Exam Part 2 - Department of Economics...

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