Question

 

1-In the long run, what is the theoretical relationship between the rate of growth in real GDP and the real rate of interest?

A) Over the long run, rates of growth in real GDP and the real interest rate should be equal.

B)There is little correlation between rates of growth in real GDP and the real interest rate.

C)Rates of growth in real GDP and the real interest rate have both historically been approximately 5% in the United States.

D)Rates of growth in real GDP and the real interest rate generally move in opposite directions.

 

2-Thanks to your stellar performance on the job, your supervisor awards you a bonus of $877. However,

things are tight for the company because of the pandemic, so your supervisor informs you that you

may get a bonus of $2,464 next year if you forego your bonus this year. If you accept this offer, what

$MRS have you revealed (in % terms to the nearest tenth, i.e., one decimal place)?

 

3-Why is a T-bill considered risk-free as long as the US is considered by international markets to be a reliable debtor (i.e., default risk free)?

A)The term to maturity of a T-bill exempts it from any maturity-related risk. Furthermore, because T-bills are backed by the government and are very marketable, they do not carry other forms of risk (as long as international markets consider the US government as a reliable debtor).

B)T-bills are typically indexed for inflation, which allows the present value of their future cash flows to remain the same regardless of market fluctuations.

C)A T-bill is not considered risk free.

D)A T-bill is a long-term investment, so any market fluctuations balance out over time. Because the government issues T-bills, there is no risk of default.

Answer 1

 

1)Rates of growth in real GDP and the real interest rate generally move in opposite directions.

2)The MRS is marginal rate of substitution that is amount of bonus have to be given up in order to gain extra bonus next year . To answer to this question , $877 have to be given up to gain extra bonus next year that is $1587 ($2464-$877).

If we accept this offer , $MRS in % terms is calculated below:-

$MRS=(Bonus given up / Extra bonus in next year)*100

=($877/$1587)*100=55.3% (i.e to one decimal place)

3)The term to maturity of a T-bill exempts it from any maturity-related risk.Furthermore , because T-bills are backed by the government and are very marketable, they do not carry other forms of risk (as long as international markets consider the US government as a reliable debtor).