Think of this question in the context of the two-period model. Households hold stocks as part...

Think of this question in the context of the two-period model.

Households hold stocks as part of their financial wealth. Assume that we recently observe stock prices rising. Also assume that consumers believe that changes in stock prices are temporary. What affect would this have on the correlation between stock price indices and consumption? Explain.

Expert Solution

Answer

The two time period model basically consist of two time period.The first time period is the current time or today and the second time period is the tomorrow or future time period .The temporary income affect only the first time period that is current but the permanment income affect both the current time and future time periods In the problem of household stocks , the stock price is increasing and this can be due to different factors like economic change within the country ,changes withing the household industries ,political events,and can be environmental changes.and with the assumption that increase in the stock price is temporary , it will have the impact on the first period in the two time period model consideration.Now , the effect of this on the correlation between the e temporary. What affect would this have on the correlation between stock price indices and consumption will be like ,inhcrease in the stock price will reduce the consumption and vice versa which is for first period only and in the second period in the two time period model , this will have neutral affect as we took the assumption of temporary affect of changes in stock prices .

HAVE A GOOD DAY !

Rahul Sunny answered 9 months ago

In the context of the two- period model without leisure we have studied in class, Define...

In the context of the two- period model without leisure we have studied in class, Define a competitive equilibrium as carefully as possible and indicate the elements involved in the definition. Make sure you clearly explain the problem and the the exogenous/endogenous variables for each decision maker.

Part 1: Consider a two-period model for the extraction of iron. Use the information below to...

Part 1: Consider a two-period model for the extraction of iron. Use the information below to answer the questions. If needed, you may round your answers to the tenths place. Circle or box your final answer. Demand in both periods: P = 200 – 2Q Marginal cost in period 1: MC = 40 Marginal cost in period 2: MC = 20 Resource endowment Q = Q1 + Q2 = 100 Discount rate: r = 10% Solve...

Question 3 It has been found that 50.3% of Malaysian households own stocks and mutual funds....

Question 3 It has been found that 50.3% of Malaysian households own stocks and mutual funds. A random sample of 300 heads of households indicated that 171 owned some type of stock. Use α= 0.05 to test the claim that there is a difference in the proportion of Malaysian households who own stocks and mutual funds. i. Identify the claim and state the H0 and H1. (1 Mark) ii. Find the critical value. (1 Mark) iii. Calculate the...

5. Liquidity demand a) In the model of demand for liquidity, there are two ways households...

5. Liquidity demand a) In the model of demand for liquidity, there are two ways households can store their wealth. What are the two choices? Describe the tradeo they face - what makes each alternative attractive? b) Describe how the demand for real money balances is aected by a decrease in the interest rate. c) Describe how an increase in output aects the demand for real money bal- ances and the interest rate.

2) Suppose you hold a portfolio of two stocks in the healthcare industry. The future outcomes...

2) Suppose you hold a portfolio of two stocks in the healthcare industry. The future outcomes for these stocks depend mainly on the next healthcare bill to be passed by Congress. The possible outcomes and returns are: Outcome Probability Return for Stock A Return for Stock B 1=Republican Bill 0.8 12% -5% 2=Democratic Bill 0.2 3% 20% What is the expected return and a standard deviation of a portfolio that has 50% of its value in stock A and 50%...

Question one Consider a two-period binomial model in which a stock currently trades at a price...

Question one Consider a two-period binomial model in which a stock currently trades at a price of K65. The stock price can go up 20 percent or down 17 percent each period. The risk-free rate is 5 percent. (i) Calculate the price of a put option expiring in two periods with exercise price of K60. (ii) Calculate the price of a call option expiring in two periods with an exercise price of K70. (iii)‘Risk management is not about elimination of...

In the two-period model of consumption, suppose that the first period income is $5,000 and the...

In the two-period model of consumption, suppose that the first period income is $5,000 and the second period income is $5,500 for both Jill and Jack. The interest rate is 10 percent. Jack’s lifetime utility function is ?1 + ?2 while Jill’s lifetime utility function is ?1 + 0.8?2. 1)Draw a graph that represents the common budget constraint that Jill and Jack face. 2)Draw indifference curves of Jill and Jack in separate graphs and compare the slopes of the indifference...

10. In the circular flow model, what are the two markets? Define households and describe the...

10. In the circular flow model, what are the two markets? Define households and describe the three basic forms of businesses. What roles do households play and what roles do businesses play in each market?

UESTION 3 and QUESTION 4: Context Suppose you are part of the analytics team for the...

UESTION 3 and QUESTION 4: Context Suppose you are part of the analytics team for the online retailer Macha Bucks which sells two types of tea to its online visitors: Rouge Roma (RR) and Emerald Earl (EE). Everyday approximately 10,000 people visit the site over a 24 hour period. For simplicity suppose we consider the “buy one or don’t buy” (BODB) market segment of customers which when they visit the site will conduct one of the following actions: (a) buy...

You are going to model households consisting of two adults—a man and a woman—and some kids....

You are going to model households consisting of two adults—a man and a woman—and some kids. (While families are increasingly diverse, we are just going to focus on these households.) The adults split their time however they like between home production and the formal labour market (i.e., working for pay). Let’s assume that households care only about efficiency. (This is a really bad assumption as it means we are ignoring a lot of really important factors like the role of...

Question