Economics for Business Studies
Economics for Business Studies II (DSME 1040GJ)
Assignment 1
Topics – Week 2, 3 Lectures
Economic Growth
Savings, Investment, and the Financial System
Total Possible Points 100
Instructions:
This is an individual assignment. Each student needs to submit this Assignment (as attachment in PDF format only) to Blackboard Drop box provided under Course Contents by 16th Feb, 12noon.
No late homework will be accepted. You are required to put down your name and student ID in the spaces provided at the top of the cover page.The format of this assignment is multiple choice (Section A) and short answer questions (Section B). Section A and B sum to 100 points. There are 20 multiple choice questions, each worth 2 points for a Section A total of 40 points. For Section A, please write your answers (letter only) at the table provided on page 2.
There are 6 short answer questions each worth 10 points for a Section B total of 60 points. The expected length of the answers in Section B to each question is 1-2 paragraphs. You may or may not be required to use a diagram. This will be indicated in the question. For Section B, please provide your answers at the space indicated with each question.
It is preferred that you type the answers (and insert the diagrams, as required for some questions), and convert the Word document into a PDF file for submission to Blackboard drop box.
Or you may write the answers (and draw the diagrams) by hand. You must scan your handwritten assignment and upload your file as a PDF file. DO NOT take pictures on your handwritten assignment and upload JPG files.
Please write down your answers carefully, comprehensively and neatly in complete sentences in the spaces provided below each question. It is your responsibility to make sure your answers and diagrams are clear and well labelled.
SECTION A (40 Points)
Multiple Choice Questions (2 Points Each)
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1. Which of the following is not correct?a. Countries that have had higher output growth per person have typically done so without higher productivity growth.b. A country’s standard of living and its productivity are closely related.c. Productivity refers to output produced per hour of work.d. Increases in productivity can be used to increase output or leisure.
2. Which of the following can explain faster growth of real GDP in country A than in Country B?a. both greater population growth and greater productivity growth in Country Ab. greater population growth in Country A, but not greater productivity growth in Country Ac. greater productivity growth in Country A, but not greater population growth in Country Ad. neither greater population growth nor greater productivity growth in Country A3. A barber shop produces 192 haircuts a day. Each barber in the shop works 8 hours per day and produces the same number of haircuts per hour. If the shop’s productivity is 2 haircuts per hour of labor, then how many barbers does the shop employ?a. 8b. 12c. 16d. None of the above is correct.
4. Dilbert’s Incorporated produced 6,000,000 units of software in 2010. At the start of 2011 the pointy-haired boss raised employment from 10,000 total annual hours to 14,000 annual hours and production was 7,000,000 units. These number indicate that productivitya. fell by about 16.7%.b. stayed the same.c. rose by about 16.7%.d. rose by about 40%.5. Human capital isa. the same thing as technological knowledge.b. the same thing as labor.c. the tools and equipment operated by humans.d. knowledge and skills that workers have acquired.
6. If your firm’s production function has constant returns to scale, and if you double all your inputs, then your firm’s productivity willa. not change.b. increase but not double.c. double.d. more than double.7. If there are diminishing returns to capital, thena. capital produces fewer goods as it ages.b. old ideas are not as useful as new ones.c. increases in the capital stock eventually decrease output.d. increases in the capital stock increase output by ever smaller amounts.8. Because of its effect on the amount of capital per worker, in the short term an increase in the working population is likely toa. raise productivity. Other things the same, this increase will be larger in a poor country.b. raise productivity. Other things the same, this increase will be larger in a rich country.c. reduce productivity. Other things the same, this decrease will be larger in a poor country.d. reduce productivity. Other things the same, this decrease will be larger in a rich country.
9. In a closed economy, national saving equalsa. investment.b. income minus the sum of consumption and government purchases.c. private saving plus public saving.d. All of the above are correct.
10. When public saving falls by $2b and private saving falls by $1b in a closed economy,a. investment falls by $1b.b. investment falls by $3b.c. investment increases by $1b.d. investment falls by $2b.11. A budget surplusa. occurs when the government has debt equal to zero.b. causes government debt to increase.c. exists when government spending is greater than tax revenues.d. reduces the government’s debt.
12. If the demand for loanable funds shifts to the left, then the equilibrium interest ratea. and quantity of loanable funds rises.b. and quantity of loanable funds falls.c. rises and the quantity of loanable funds falls.d. falls and the quantity of loanable funds rises.
13. Which of the following could explain a decrease in the equilibrium interest rate and in the equilibrium quantity of loanable funds?a. The demand for loanable funds shifted rightward.b. The demand for loanable funds shifted leftward.c. The supply of loanable funds shifted rightward.d. The supply of loanable funds shifted leftward.
14. The present value of an expected future payment ________ as the interest rate increases.a. fallsb. risesc. is constantd. is unaffected15. If a security pays $55 in one year and $133 in three years, its present value is $150 if the interest rate isa. 5 percent.b. 10 percent.c. 12.5 percent.d. 15 percent.
16. The yield to maturity is ________ than the ________ rate when the bond price is ________ its face value.a. greater; coupon; aboveb. greater; coupon; belowc. greater; perpetuity; aboved. less; perpetuity; below
17. What is the Present value of $300 to be paid in 3 years if the interest rate is 12%? (rounded up to nearest dollar)a. $256b. $214c. $356d. None of the above
18. What is the yield to maturity of a bond maturing in one year that has a face value of $10,000, a coupon payment of 5% of face, where the current price of the bond is at face value or $10000?a. 10.5%b. 5.5%c. 5%d. None of the above
19. What is the yield to maturity of a bond maturing in one year that has a face value of $10,000, a coupon payment of 5% of face, where the current price of the bond is at $9500?a. 10.5%b. 5.5%c. 5%d. None of the above
20. What is the yield to maturity of a bond maturing in one year that has a face value of $10,000, a coupon payment of 5% of face, where the current price of the bond is currently trading at $10,300?a. 5.54%b. 1.94%c. 3.74%d. None of the aboveSECTION B (60 Points)
Short-Answer Questions (10 Points Each)
1. Draw the diagram in class depicting the capital labor ratio (K/L) on the horizontal axis and labor productivity (Y/L) on the vertical axis. Illustrate on your diagram an increase in total factor productivity. Explain. (10 points)
2. Demonstrate using a demand-supply diagram of the market for loanable funds the impact of an increase in the tax on saving deposits. Explain your reasoning. (10 points)
3. Carefully explain using theory from lectures and evidence from the Chinese economic growth experience why it is unlikely that China will return to the 10% long-term trend growth rate that existed between 1978 and 2012, due to two structural reasons, using theory from class. A diagram is required. (10 points)
4. Using an appropriate diagram demonstrate the impact of the imposition of an investment tax credit in China, carefully explaining the new equilibrium levels of loanable funds and the equilibrium interest rate? (10 points)
5. Go to the FRED database (Federal Reserve Economic Data | FRED | St. Louis Fed (stlouisfed.org)) for this question. A market based measure of inflation expectations is the 5-year, 5-Year Forward Inflation Expectations Rate. The FRED code is T5YIFR. The 10 year US Treasury bond benchmark yield. FRED code is IRLTLT01USM156N. Using monthly data, download (Excel, or Python, R, etc.) both series for the period 2019-01-01 to 2022-12-01. Compare the two data series, identifying their peak and trough over this time period, providing intuition as to the reason for the relationship between them using an important piece of theory from class. (10 points)
6. Two mini questions each 5 points for total of 10 points.
a) Suppose the face value of a coupon bond is $10,000. The coupon rate is 7% of face. What is the yield-to-maturity, if there is one year before maturity and the current market price of the bond is $10,150? (5 points)
b) The US Treasury 10-year bond yield is 2.5%, European 10-year Government bond yield is 3% and the US Treasury 5-year bond yield is 2.3%. The IBM 5 year corporate bond yield is 4.5% and the 10-year corporate bond yield on DAISY computers (France listed IT company) is 11.8%. What is the credit spread on IBM and DAISY ? (5 points)