Explain why an Interest Rate Swap (assume LIBOR as the floating rate) with quarterly settlement (assume 90 days per quarter) can be viewed as a strip of Eurodollar futures contracts. (Note: A strip is a sequence of ED futures with successive expirations) Note:

This question is worth 10 marks.

A loan is being repaid with 20 payments of $ 1,000 at the end of each quarter. Given that the nominal rate of interest is 8% per year compounded quarterly, find the outstanding balance of the loan immediately after 10 payments have been made (a) by the prospective method, (b) by the retrospective method.

Imagine you plan to flip a regular quarter three times. Round final answers to three decimal places (Ex. 0.xxx). Do not round until you get to the final answer. What is the mean, or expected value, of the number of heads in three coin toss experiment

A deferred annuity is purchased with a lump sum amount of $308,273.17. Suppose money is worth 5% compounded quarterly, and 13 years after the 5 year deferral period, the account is empty. Use this information to compute how much the annuity will pay per quarter after the deferral period.

Consider a stock with a beginning of the year price of 21. The stock's dividends and quarterly stock price are as follows:

The effective annual yield on this stock is ____________.

A prize pays $16,000 each quarter for 4 years (16 payments)commencing in exactly 6 months’ time. If the appropriate discount rate is 9.7% p.a compounding quarterly, the value of the prize today is (round to nearest cent; don’t use $ sign or commas): [HINT: the annuity is deferred]

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.

compute the equilibrium level of investment.

compute teh equilibrium level of consumption.

suppose government spending is raised to 1250 (instead of 1230). Compute the amount by which investment falls.

the amount by which investment falls is _____ the amount by which government spending rises.

Now change the model above so that the consumption function involves the interest rate as follows:

C = 1070 + 0.5(Y-T) - 1000r

Compute the equilibrium values of the interest rate and investment for the cases of G=1230 and G=1250. How much is investment crowded out now by the rise in G? Report below the amount by which investment falls when G rises from 1230 to 1250.

Great recession in 2008 experienced the burst of housing market bubble, which led financial market crisis.

You were hired as a chief economic advisor in a major corporate, and they would like to know more about macroeconomic conditions in 2008.

Your responded one of followings;

1. Aggregate demand fell in 2008. Here are the reasons; Unemployment and lower income, resulting from a drop in consumer spending and investment, meant governments took in less in tax revenue. This caused government spending to drop.
2. The Great Recession was caused by the Fed’s policy which created artificially low interest rates, and Government housing policy which encouraged bad mortgages.
3. Recovery was slow because of productivity decrease from 2005, and policy uncertainty in 2008.
4. Aggregate demand fell in 2008 because the Fed policy was not expansionary enough.

Explain your response based on the economic theory that you are subscribing (eg.  Real business cycle theory, Keynesian, Austrian, Monetarists etc.).

1. For the table shown, answer the following questions:

1. What is the marginal propensity to consume for households in this economy?
2. Based on the assumptions of our aggregate expenditure model, fill in the columns for planned investment, government spending, and net exports. What is this type of expenditure called?
3. For each level of actual aggregate expenditure, calculate unplanned inventory investment.
4. What is the equilibrium level of aggregate expenditure in this economy? How do you know?
5. For each level of actual aggregate expenditure, label the future output tendency as “increase,” “decrease,” or “same” based on what you expect to happen to future output. What relationship does this categorization have to your answer in part d?