302fall11pp2ans UD - UNIVERSTITY OF DELAWARE PROFESSOR DAVE...

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Unformatted text preview: UNIVERSTITY OF DELAWARE PROFESSOR DAVE WHARTON DEPARTMENT OF ECONOMICS FALL 2011 ECON 302 PRACTICE PROBLEM SET 2: ANSWERS QUESTIONS AND PROBLEMS FROM THE TEXTBOOK: 1. (a) Less, because your wealth has declined; ( b ) m o r e , b e c a u s e i t s r e l a t i v e e x p e c t e d r e t u r n h a s r i s e n ; ( c ) l e s s , b e c a u s e i t h a s b e c o m e l e s s l i q u i d r e l a t i v e t o b o n d s ; ( d ) l e s s , b e c a u s e i t s e x p e c t e d r e t u r n h a s f a l l e n r e l a t i v e t o g o l d ; ( e ) m o r e , b e c a u s e i t h a s b e c o m e l e s s r i s k y r e l a t i v e t o b o n d s . 2. (a) More, because wealth increased. ( b ) M o r e , t r a n s a c t i o n s c o s t s d e c r e a s e d . ( c ) L e s s , e x p e c t e d r e t u r n o n a n a l t e r n a t i v e a s s e t i n c r e a s e d . ( d ) M o r e , i n c r e a s e v o l a t i l i t y m e a n s t h a t s t o c k s ( a l t e r n a t i v e a s s e t s ) a r e r i s k i e r . ( e ) L e s s , e x p e c t e d r e t u r n o n h o u s e d e c r e a s e s . 3. (a) More, because it has become more liquid; ( b ) l e s s , b e c a u s e i t h a s b e c o m e m o r e r i s k y ; ( c ) m o r e , b e c a u s e i t s e x p e c t e d r e t u r n h a s r i s e n ; ( d ) m o r e , b e c a u s e i t s e x p e c t e d r e t u r n h a s r i s e n r e l a t i v e t o t h e e x p e c t e d r e t u r n o n l o n g- t e r m b o n d s , which has declined. 4. (a) More, more trading implies greater liquidity for ATT bonds. ( b ) M o r e , l o w e r e x p e c t e d r e t u r n s o n a n a l t e r n a t i v e a s s e t . ( c ) L e s s , t r a n s a c t i o n s c o s t s o n a n a l t e r n a t i v e a s s e t d e c r e a s e . ( d ) L e s s , i f i n t e r e s t r a t e s r i s e t h e p r i c e o f t h e A T T b o n d w i l l d e c r e a s e i n t h e f u t u r e . ( e ) M o r e , l o w e r t r a n s a c t i o n s c o s t s o n b o n d s . P B B S 6. If the Fed sells bonds the supply of bonds (B S ) will B S s h i f t t o t h e r i g h t . T h i s w i l l d e c r e a s e b o n d p r i c e s a n d i i n c r e a s e i n t e r e s t r a t e s . B D Q o f B o n d s I f t h e F e d s e l l s b o n d s t h e m o n e y s u p p l y w i l l d e c r e a s e ....
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302fall11pp2ans UD - UNIVERSTITY OF DELAWARE PROFESSOR DAVE...

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