(a)
Whether the given statement is true, false or uncertain.
(a)
Answer to Problem 1QAP
The statement is false.
Explanation of Solution
The nominal interest rate is measured in terms of money and the real interest rate, which is adjusted for inflation, is measured in terms of goods. Thus, the given statement is false.
(b)
Whether the given statement is true, false or uncertain.
(b)
Answer to Problem 1QAP
The statement is true.
Explanation of Solution
The difference between the expected inflation rate and the nominal interest rate is equal to the real interest rate.
Thus, any changes in real interest rate will lead to movement in nominal interest rate, keeping expected inflation constant. Hence, the given statement is true.
(c)
Whether the given statement is true, false or uncertain.
(c)
Answer to Problem 1QAP
The statement is true.
Explanation of Solution
During 2013, the nominal interest rate in the US was around 0.25 as the economy was recovering from sub-prime crises. Thus, it is true that the nominal interest rate was at the zero level bound in the US in 2013.
(d)
Whether the given statement is true, false or uncertain.
(d)
Answer to Problem 1QAP
The statement is true.
Explanation of Solution
The relation between expected inflation, nominal interest rate and real interest rate is given as followsL
realinterestrate=[nominalinterestrate−expectedinflationrate]
Thus, it is true that when expected inflation increases, the real rate of interest falls.
(e)
Whether the given statement is true, false or uncertain.
(e)
Answer to Problem 1QAP
The statement is false.
Explanation of Solution
There are different types of bonds with different levels of risk involved. Thus, the statement that all bonds have similar risk of default and hence pay equal rates of interest is false.
(f)
Whether the given statement is true, false or uncertain.
(f)
Answer to Problem 1QAP
The statement is true.
Explanation of Solution
It is the central bank of the economy that sets nominal rate of interest. Thus, the given statement that the nominal interest rate is set by the central bank is true.
(g)
Whether the given statement is true, false or uncertain.
(g)
Answer to Problem 1QAP
The statement is true.
Explanation of Solution
The leverage ratio is a bank's debt ratio against its equity/capital. A high leverage ratio implies that a firm has done a lot of investment from the credit taken.
Thus, chances of bankruptcy increase with higher leverage ratio.
However, if the credit taken is used in an efficient manner, then high leverage ratio leads to a rise in expected profit.
Thus, the statement that a rise in a banks’s leverage ratio leads to increase in both the expected profit of the bank and the risk of the bank going bankrupt is true.
(h)
Whether the given statement is true, false or uncertain.
(h)
Answer to Problem 1QAP
The statement is false.
Explanation of Solution
The rate at which money is borrowed is known as the borrowing rate and the policy rate measures the lending rate of the central bank. The two rates may differ in context of risk premium.
Thus, the statement that real borrowing rate and the real policy rate always move on the same direction is false.
(i)
Whether the given statement is true, false or uncertain.
(i)
Answer to Problem 1QAP
The statement is true.
Explanation of Solution
Financial crises include loss in the value of assets, stock market crashes and other currency crises.
In such situations, it gets difficult to measure the assets of banks and other financial intermediaries. Thus, the given statement is true.
(j)
Whether the given statement is true, false or uncertain.
(j)
Answer to Problem 1QAP
The statement is true.
Explanation of Solution
A high leverage implies high debt-equity ratio and in case of low liquidity, financial institutions are not able to convert their assets into cash easily.
Thus, the statement when a bank has high leverage and low liquidity, it may have to sell assets at fire sale prices is true.
(k)
Whether the given statement is true, false or uncertain.
(k)
Answer to Problem 1QAP
The statement is true.
Explanation of Solution
Any deposit by public with the banks includes the liabilities of the banks. Banks have to present such deposits on immediate demand of the public. However, assets owned by banks cannot be converted into money easily.
Thus, the given statement that banks and other financial intermediaries have assets that are less liquid than their liabilities is true.
(l)
Whether the given statement is true, false or uncertain.
(l)
Answer to Problem 1QAP
The statement is false.
Explanation of Solution
The housing prices in the US economy fell significantly2005 onwards. Thus, the given statement that house prices rose constantly in the U.S. economy since 2000 is false.
(m)
Whether the given statement is true, false or uncertain.
(m)
Answer to Problem 1QAP
The statement is true.
Explanation of Solution
Fiscal policy refers toincrease in government spending or decrease in tax rates. Such policy help in stimulating aggregate demand to reduce recession.
Thus, the given statement that the fiscal stimulus program adopted by the United States in relation to the financial crises helped counter the fall in aggregate demand and reduce the size of the recession is true.
(n)
Whether the given statement is true, false or uncertain.
(n)
Answer to Problem 1QAP
The statement is true.
Explanation of Solution
Fiscal policy involves large government expenditure which further leads to rise in budget deficit.
Thus, the given statement that fiscal stimulus program adopted by the United States included a large increase in the deficit measured as a percent of
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Chapter 6 Solutions
Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
- Identify the two curves shown on the graph, and explain their upward and downward slopes. Why does curve Aintersect the horizontal axis? What is the significance of quantity d? What does erepresent? How would the optimal quantity of information change if the marginal benefit of information increased—that is, if the marginal benefit curve shifted upward?arrow_forward6. Rent seeking The following graph shows the demand, marginal revenue, and marginal cost curves for a single-price monopolist that produces a drug that helps relieve arthritis pain. Place the grey point (star symbol) in the appropriate location on the graph to indicate the monopoly outcome such that the dashed lines reveal the profit-maximizing price and quantity of a single-price monopolist. Then, use the green rectangle (triangle symbols) to show the profits earned by the monopolist. 18 200 20 16 16 14 PRICE (Dollars per dose) 12 10 10 8 4 2 MC = ATC MR Demand 0 0 5 10 15 20 25 30 35 40 45 50 QUANTITY (Millions of doses per year) Monopoly Outcome Monopoly Profits Suppose that should the patent on this particular drug expire, the market would become perfectly competitive, with new firms immediately entering the market with essentially identical products. Further suppose that in this case the original firm will hire lobbyists and make donations to several key politicians to extend its…arrow_forwardConsider a call option on a stock that does not pay dividends. The stock price is $100 per share, and the risk-free interest rate is 10%. The call strike is $100 (at the money). The stock moves randomly with u=2 and d=0.5. 1. Write the system of equations to replicate the option using A shares and B bonds. 2. Solve the system of equations and determine the number of shares and the number of bonds needed to replicate the option. Show your answer with 4 decimal places (x.xxxx); do not round intermediate calculations. This is easy to do in Excel. A = B = 3. Use A shares and B bonds from the prior question to calculate the premium on the option. Again, do not round intermediate calculations and show your answer with 4 decimal places. Call premium =arrow_forward
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- Driving Quiz X My Course G city place w x D2L Login - Univ X D2L Login - Univ x D2L Login - U acmillanlearning.com/ihub/assessment/f188d950-dd73-11e0-9572-0800200c9a66/4db68a5e-69bb-4767-8d6c-a12d +1687 pts /1800 © Macmillan Learning Question 6 of 18 > The graph shows the average total cost (ATC) curve, the marginal cost (MC) curve, the average variable cost (AVC) curve, and the marginal revenue (MR) curve (which is also the market price) for a perfectly competitive firm that produces terrible towels. Answer the three questions, assuming that the firm is profit-maximizing and does not shut down in the short run. What is the firm's total revenue? S What is the firm's total cost? $ What is the firm's profit? (Enter a negative number for a loss.) $ Price $320 $300 $200 $150 205 260 336 365 Quantity MC ATC AVC MR=Parrow_forward1. Suppose that the two nations face the following benefits of pollution, B, and costs of abatement, C: BN = 10, Bs = 7; CN = 5, Cs = 4. Further assume that if the nation chooses to abate pollution, it still receives the benefits of pollution but now must pay the cost of abatement as well. a. Identify the payoffs that accrue to each nation under the four different possible outcomes of the game and present these payoffs in the normal form of the game. b. Recall that the term dominant strategy defines the condition that a player in a game would prefer to play that strategy (in this case either pollute or abate) regardless of the strategy chosen by the other player in the game. Does either nation have a dominant strategy in this game? If so, what is it? c. Identify the Nash equilibria, or non-cooperative equilibria, of this game.arrow_forwardagrody calming Inted 001 and me 2. A homeowner is concerned about the various air pollutants (e.g., benzene and methane) released in her house when she cooks with natural gas. She is considering replacing her gas oven and stove with an electric stove comprising an induction cooktop and convection oven. The new appliance costs $900 to purchase and install. Capping the old gas line costs an additional $150 (a one-time fee). The old line must be inspected for leaks each year after capping, at a cost of $35 for each inspection. a. If the homeowner plans to remain in the house for four more years and the discount rate is 4%, what is the minimum present value of the benefits that the homeowner would need to experience for this purchase to be justified based on its private net sub present value? b. While trying to understand how she might express the value of reduced exposure to indoor air pollutants in dollar terms, the homeowner consulted the EPA website and found estimates provided by…arrow_forward
Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning
