Statement 1: The actual relationship between the risk-free rate of return ( r* ) and the expected future inflation rate or inflation premium (IP) is actually multiplicative—that is, [(1 + rRF ) x (1 + IP)] – 1—but it is often simplified to reflect an additive relationship. Statement 2: All else being equal, the more highly that savers and investors prefer immediate spending to deferred consumption, the lower the compensation that savers and investor will require to induce them to make an investment that will necessitate postponed spending. Statement 3: A risk-free asset is one characterized by guaranteed returns, whereas the cash flows of a risky asset may be greater or less than the expected or promised returns. Statement 4: For the average rational investor or saver, there is an indirect, or inverse, relationship between the amount of risk exhibited by a security and the risk premium that would be required by the investor or saver.

The true statements are:

2 and 4

1, 2, and 3

1 and 3

1, 2, 3, and 4

1. Consider the following national-income model.

Y = AE（1）
AE = C + I0 + G0（2）

C = C0 + bY 0 < ? < 1（3）

(a)Remaining in parametric form (do not sub in parameter values), build the equation for total spending AE (also known as aggregate demand).

(b) Continuing in parametric form, find the RFE for equilibrium national income Y* (also known as equilibrium national output).

(c) Using the parameter values ?0 = 25, ? = 0.75, ?0= 50, and ?0 = 25, find the total spending equation.

(d) Solve for the numeric value of ?

(e) Sketch a graph depicting this model. Label well.

(f) In 2-5 sentences, explain what will happen if this economy produces at an output level greater than its equilibrium level.

(h) Find the multiplier for this economy.

(i) Use the multiplier to find the new equilibrium level of national income if ?0 decreases to 15.

consider an economy that abides by a mundell fleming model. Capital is imperfectly mobile, prices are perfectly sticky in the short run, and the exchange rate is fixed. Assume the current exchange rate is at its target and the current domestic interest rate is equal ot the foreign interest rate. Suppose the local central bank wants to stimulate economic activity by increasing the supply of money through conventional open market operations. Which of the following (domestic and foreign) policies would assist the domestic central bank in achieving its goal?

A. A foreign central bank increases the supply of its currency on the FX market (supply of Fx goes up) and domestic government spending rises.

B. Foreigners stop purchasing domestic exports (x falls) and domestic government spending falls.

C.The foreign price level falls

D. A foreign central bank raises its local interest rates (foreign investment goes up)

Consider the following open economy (Home economy). The real exchange rate is fixed and
equal to one. Saving, investment, government spending, taxes, imports and exports are given
by:
S = -60 + 0.18Y
I = I
G = G

T = T0 + 0.1Y
Q = 0.1Y
X = 0.1Y*
where T0 is the level of autonomous taxes, and an asterisk is used to designate variables related
to the foreign economy.

Assume Foreign economy has the same equations as Home economy. Moreover, use the
following values for the autonomous variables:
I = 300, G = 300, T0 = 100

(a) Solve for the equilibrium values of income, Y, and Y* in both economies. (5 points)
(b) Find the multiplier of government spending for each economy now? (4 points)
(c) Why is it different from the multiplier found above using the given values for the
autonomous variables? (4 points)
(d) Find the equilibrium values for government and trade deficits in each economy. (5
points)

4.Ali inherits $10,000 from his great-great aunt in 2008. His great-great aunt's will requires that Ali spend the money before December 31, 2009. He has two spending options: He can either spend the amount in 2008 or in 2009. Suppose this is Ali's only source of income and the interest rate on loans or savings is 10 percent. (a) How much could Ali spend in 2008 if he only consumes in 2008? How much could Ali spend in 2009 if he only consumes in 2009? (b) What is the opportunity cost of consuming $1.00 in 2008 in terms of forgone consumption in 2009? Draw Ali's budget constraint and optimal consumption bundle, considering that the spending in 2008 is measured along the horizontal axis. (c) Ali decides to spend $6,000 in 2008 and $4,400 in 2009. Show this optimal consumption bundle using a budget constraint and indifference curve diagram.

Although President Roosevelt increased government spending during the great depression, the great stimulus id not come until World War II. Between 1940 and 1945 government expenditures on national defense increased significantly. For example, national defense spending grew from a yearly rate of $3 billion in 1940 to $15 billion in 1941, $53 billion in 1942, and to $87 billion in 1943. To finance the war, the government had to increase taxes. Assume the MPC is .9 All the following problems require mathematical calculations. a) What was the effect of the increase in government expenditures on from 1941 to 1942 on AD? b) If income taxes increased by $4 billion, what happened to the increase in AD described in part (b)? c) If the government increased transfer payments by $4 billion, how would it affect the economy? d) If the government had increased income taxes by $4 billion and transfer payments by $4 billion, how would it have affected AD?

1. Al Fara Corporation makes a product with the following standard costs:

During October, 1,900 unitswere produced. The company reported the following results concerning this product at the end of  October:

1. Compute the Direct materials price variance (Spending) and quantity variance for the month of October. State if these variances are favorable or unfavorable. (2pts)
2. Compute the Direct Labor rate variance (Spending) and labor efficiency variance (quantity) for the month of October. State if these variances are favorable or unfavorable. (1pt)

Problem 12-26 Adjusted Cash Flow From Assets [LO3]

You have looked at the current financial statements for Reigle Homes, Co. The company has an EBIT of $2,890,000 this year. Depreciation, the increase in net working capital, and capital spending were $227,000, $92,000, and $425,000, respectively. You expect that over the next five years, EBIT will grow at 18 percent per year, depreciation and capital spending will grow at 23 per year, and NWC will grow at 13 per year. The company currently has $15,500,000 in debt and 415,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.5 percent indefinitely. The company’s WACC is 8.9 percent and the tax rate is 35 percent.

What is the price per share of the company's stock? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Share price            $

1. The next several questions refer to the case of an economy with the following equations: Y = 3K + 2L, with K = 1000 and L = 1500 G = 1230, T = 500 I = 1020 - 1000r C = 1070 + 0.5(Y-T) (Assume a closed economy: Y = C + I + G; NX = 0) Compute the equilibrium level of the interest rate.

choices

0.07

0.05

0.3

0.1

2. For the case above, compute the equilibrium level of investment.

980

900

1000

750

950

3. For the case above, compute the equilibrium level of consumption.

3700

3820

3750

4000

4200

4. For the model economy above, suppose government spending is raised to 1250 (instead of 1230). Compute the amount by which investment falls.

10

15

0

30

20

5. In the case above, the amount by which investment falls is _____ the amount by which government spending rises.

less than

more than

the same as