Short Answers Final Flashcards
You expect a share of ABC’s stock to sell for $65 a year from now and to pay a $3 dividend per share in one year. What should you pay for the stock if you require an 9% return? Name two factors that affect stock price.
Expected future price and dividend can affect stock price
Define business cycle. How does output and unemployment change during recessions?
Business cycles are short term fluctuations in GDP and other variables.
During recessions, unemployment rate rises and output drops.
What are the benefits and costs of holding money? What are the shapes of money demand and money supply curves? Explain why they assume such shapes.
1)The benefit of holding money is to make transactions. The cost of holding money is the interest foregone.
2)Money demand curve is downward sloped, as higher interest rate means higher
opportunity cost of holding money.
3)Money supply curve is vertical because money supply is
determined by the Fed and is independent of the interest rate
when the Fed conduct an open market purchase. Explain step by step how this change in interest rate affect the short run output.
When the Fed conduct open market purchases, money supply increases, interest decreases.
Consumption and planned investment increase, causing PAE line to shift upward.
Output increase in the short run.
