(See attached file for full problem description with proper equations and charts)
1) Consider the following model: Yi = Bo + B1Xi +B2D2i + B3D3i + ui
Where Y = annual earnings of MBA graduates
X = years of service
D2 = 1 if Harvard MBA
= 0 if otherwise
D3 = 1 if Wharton MBA
= 0 if otherwise
a. What are the expected signs of the various coefficients?
b. How would you interpret B2 and B3?
c. If B2 > B3, what conclusion would you draw?
2. Table below gives data on after tax corporate profits and net corporate dividend payments ($, in billions) for the United States for the quarterly period of 1999:1 to 2003:3.
a. Regress dividend payments (Y) on after tax corporate profits (X) to find out if there is relationship between the two.
b. To see if the dividend payments exhibit any seasonal pattern, develop a suitable dummy variable regression model and estimate it. In developing the model, how would take into account that the intercept as well as the slope coefficient may vary from quarter to quarter?
c. When would you regress Y on X, disregarding seasonal variation?
d. Based on your results, what can you say about the seasonal pattern, if any, in the dividend payment policies of U.S. private corporations? Is this what you expected a priori?
Assess the seasonal pattern of payment dividends in this case.
3. Let's think about currency boards. Consider the Hong Kong Monetary authority which is the currency board for Hong Kong. The exchange rate is fixed at HK$ 7.75/US$
The balance sheet for authorized institutions in the banking sector in Hong Kong looked like this as of February, 1997:
Banking System Assets Banking System Liabilities
Foreign Currency Reserves = HK $682 The Domestic Money Supply = HK$2,828
Net Lending and Other
Debt Instruments Held = HK $ 2,146
a. Briefly explain how a currency board system works.
b. Given your explanation in (a), how can the money supply be so much larger than the actual holdings of forex reserves of the Hong Kong Monetary Authority (the central bank). Assume the central bank is holding all HK 682 of the forex reserves.. I am looking for a key concept here with a number to go with it.
Assuming that Hong Kong comes about as close to the paradign for perfect capital mobility as one can get, answer the following questions:
c. Might one observe a seasonal pattern to interest rates in Hong Kong ? Might one observe a seasonal pattern to foreign reserve holdings of the monetary authority ?
d. Using the IS/LM graphically show the economic effect of foreigners selling off in large quantities Hong Kong financial assets and repatriating their US$, Swiss Francs and Euros etc. home.
e. In the case of a recession, what type of stimulative policies would you recommend - monetary, fiscal, both, neither. Be precise.