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
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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
~

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- Winter '09
- SUMAILA
- new firms, stock market model, Phase Ill
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