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 (doublesided) of notes.
You may
not
use a calculator.
Problem 3
/ 20
Problem 4
/ 30
TOTAL PART 2
/ 50
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Problem 3:
MortgageBacked 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 infiniteperiod
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 '08
 chugh
 Economics, representative, Natural logarithm, Mortgagebacked security, MBS stock

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