1. Suppose that an earthquake destroys part of the capital stock. Predict what will happen to (1) total production, (2) the real return to capital, and (3) the real wage. For simplicity, assume that the size of the population is unaffected.
a. Calculate the equilibrium values of and
b. Calculate the equilibrium values of private saving, government saving, and total saving.
c. Now suppose that there is a technological innovation that makes businesses want to invest more, so that the new investment function is Calculate the new equilibrium values of and
d. Calculate the new equilibrium values of private saving, government saving, and total saving.
3. Suppose that the government finances an increase in expenditures by raising taxes, so that the budget remains balanced (in other words, ). What happens to the interest rate and investment? For simplicity, assume that the MPC out of the tax cut is positive and less than one.
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The equilibrium values of private saving and government saving are determined.
Valuing Debt & Debt Policy
1. Explain how changes in debt-equity ratio impact the beta of the firm's equity. Provide a mathematical example to support your analysis.
2. What are the ramifications of a firm having a "less than optimal" or "wrong" capital structure?
1. In describing an optimal investment portfolio for someone who is 22 years of age, what would you recommend to them with respect to their distribution of stocks and bonds? Would your recommendation change if the person were 45 years old? Would it change if they were 85 years old?
2. If you were going to assess the riskiness of bonds, what types of characteristics (variables) would you consider? For example, "time" would be a variable (long vs. short-term bonds). Which of the variables that you have listed would be the most important? How would you rank order your considerations?
3. Using the Internet, find an example of how bonds' returns demonstrate the "term structure of interest rates."
4. Why do bonds of different maturities have different yields in terms of the expectations, liquidity, and segmentation hypotheses? Describe how these hypotheses relate to two different situations: 1) when the yield curve is upward sloping; 2) when the yield curve is downward slopingView Full Posting Details