345 2012 MT with answers

March 2012
Departmmt of Economics
UNIVERSITY OF BRlTlSH COLUMBIA
ECO"' 345
Midterm
G.
~ewman
Name
Student No., ____ _ _ _
(last name first)
2hrs.
TOTAL POI;\TS: 75
Section A: Multiple Choice: (30 x 1.5 points= 45)
I. Suppose that. at time t, the earnings or an asset you currently hold arc expected to
per.nlJincntly rise at time t+2 and remain at the higher level indefinitely. Then. giYen your
initial purchase price, the yield to maturity of this asset must _ __ _
a))
rise
b)
fall
c.)
remain constant
d.)
change ambiguously
Suppose that you diet not
own
this asset. All agents forecast correctly the funH-c earnings
increase at time t-1. If you bought the asset at timet. you would
su.
tain ___ when you
sold it. · •'' ' •
a.)
a capital gain
h l a capital loss
c l neither a gain or a loss
J.
Suppose that at timet + I, it became known that the Central Bank was to start
raisin~
interest ;;
rates for the next two or three years. Jfyou bought the asset at timet (as above). a1;d sold it
at
time t- 2. you would most likely rccci\·e a:
<~
J capital loss
b)
capital gain
c.)
could be either
4. 'vVhcn interest rates are expected to fall in the future. this
of a bond and a current holder of a bond: .
a. )
benefits, benefits
h)
benefits. hurts
c
J
hurts. benefits
d .)
hurts. hurts
_a prospccti\·e purchaser

5.
In Phase
1
of the stock market model, an a\·eragc
ne11·
fm11
would
have expected
camings
than current reported earnings and an average oJd ftm1 would haYe expected
- - - -
earnings_ than current reportcd earnings.
n.)
greater. less
b l
less, greater
c)
equal to , less
d)
Jess
equal to '
'
--
e)
less,
less
6. At the very beginning of Phase IV of our stock market model, financial incentives to beat
earnings expectations arc , and average stock prices arc almost certainly
· 7. As
\Ne move later on in Phase
l V, our model
imp! ics that the bottom of the stock marker
occurs the bottom of the actual earnings cycle:.
a) Before
b.)A ti er
c.)
At the same time
as
R. After a burst of growth. the growth rate of eamings
y
falls to I
~din it s;ly
for an economy.
As time goes on. the proportion of new firms a would t and eventually stock
market prices wou ld peak actlJal earning.s
uu.
a
l
Rise. before
b.)
Fall. at the same time
as
..: l
Not change. after
d) Fall, af'tc;
e.)
Not change. at the same rime as
~