Quiz 1 Flashcards
Examples of the effects of price controls: Gas lines, SF quake, Bread/wheat example, trailer parks
a
Taxes: burdens on the buyer and seller
a
New Zealand tariff example—why a small country is hurt by a tariff while a big country can gain
a
Dollar outflows—the harmless kind caused by trade deficits
a
Subsidy: benefits to buyers and sellers and DWL
a
Exhaustible resources: graph showing loss from forced conservation
a
Present/future value calculations for 1 period, n periods, perpetuities, annuities
a
PV of an annuity, and how to shrink the equation
a
The net present value rule for investments
a
Compounding: relation between annual, monthly, daily, and continuous compounding
a
PV/FV calcs with changing interest rates
a
How to arbitrage mis-priced bonds
a
Bond pricing: interest/principal distinction Tranching and coupon stripping, zero-coupon bonds
a
Duration and volatility
Vol=Dur/(1+R)
The aging problem: when to cut a tree
a
Interest parity, and arbitrage resulting from parity violations
a
Measuring inflation with the CPI
a
The Fisher Equation
a
Inflation and the stacking of loan repayments
a
The Gold Lease Rate as a measure of the real interest rate
a
Equivalent Annual Cost: How to compare projects with different lives and initial costs
a
Intertemporal choice graph: Borrowing and lending shown with budget lines and indifference curves
a
- Demand curve: P = $100 – 2Q Supply curve: P = $10 + 4Q If a tax of $30 per unit is imposed in this market, the dollar price paid by buyers will be a. 10 b. 20 c. 40 d. 60 e. 80
e. 80
- The market interest rate is 5% and a bond promises a single payment of $105 in 1 year. That bond is currently selling for $99. The correct arbitrage strategy for an investor to follow would have to involve: a. buying that bond b. lending money c. going long in stocks d. borrowing that bond and selling it e. selling that bond.
a. buying that bond
- You invest $100 in a project today. In the first year you earn a 20% return. In the second year you re-invest all the principal and interest and earn a return of -10%. Thus your average rate of return is 5%. How much money will you have at the end of two years? a. $105 b. $106 c. $108 d. $110 e. $112
c. $108
- In the intertemporal choice model (C0 and C1 ) an individual is endowed with only future goods and no current goods. A drop in the real interest rate would cause the budget line to ______and move______. a. steepen, downward b. steepen, upward c. flatten, downward d. flatten, upward e. keep a constant slope, upward
d. flatten, upward
- If the forward price of pounds is lower than the spot price of pounds ($/pound), that is an indication that: a. the British interest rate is expected to rise b. the US inflation rate is low c. the US inflation rate is less than the British interest rate d. the British interest rate is greater than the US interest rate e. the US interest rate is expected to fall
d. the British interest rate is greater than the US interest rate
- When the demand curve for some good is relatively steep and the supply curve is relatively flat, a subsidy on that good will mostly benefit: a. consumers b. producers c. taxpayers d. foreigners e. producers of substitute goods
a. consumers
- An acre of land rents for $2 per year, payable at the end of each year. The land, and the rent payments, last forever. The land currently sells for $40. What is the nominal market rate of interest? a. 3% b. 4% c. 5% d. 6% e. 7%
c. 5%
- The market interest rate is 5% and a bond promises a single payment of $105 in 1 year. That bond is currently selling for $99. The correct arbitrage strategy for an investor to follow would have to involve: a. buying that bond b. lending money c. going long in stocks d. borrowing that bond and selling it e. selling that bond.
a. buying that bond
- When a 1-year forward contract for wheat is delivered, the seller of the wheat receives a price_____. a. equal to the current (i.e., at the time of delivery) spot price b. equal to the 1-year forward price that had been set 1 year before c. equal to last year’s spot price d. equal to the current spot price, plus any increase in price that happened since last year e. equal to the current spot price marked to market
b. equal to the 1-year forward price that had been set 1 year before
- Countries A and B trade only with each other. No cash ever flows between the two countries. Country A buys apples and bonds from B, while B buys only bananas from A. We can be certain that: a. this trade is not mutually beneficial b. B will experience inflation c. A will experience inflation d. B is running a trade deficit e. A will be poorer as a result of this trade
d. B is running a trade deficit
