1. Hana purchased for $100,000 two-year Treasury notes with a total principal amount of $110,000 and all with coupon rates of 5% paid annually. With one year before the notes mature (and after receiving the coupon payments for the first year), Hana sells the notes in the open market when Treasury notes with one year left to maturity are yielding 11.0577%. Hana’s rounded one-year rate of return earned from her purchase of the Treasury notes is equal to _____%.
2. Dave’s Mirror Company expects to sell $900,000 worth of mirrors while producing $600,000 worth of mirrors in the coming year. The company plans to, and does, purchase, $500,000 of new equipment during the year. Sales for the year turn out to be $500,000. ACTUAL INVESTMENT by Dave’s Mirror Company equals _____ and PLANNED INVESTMENT equals _____.
Answer: $600,000; $200,000
3.An economy produces 1100 computers valued at $1000 each. Households purchase 400 computers of which 100 are imported. Businesses purchase 500 computers of which 200 are imported. The government purchases 100 domestically produced computers and 300 domestically produced computers are sold abroad. The unsold computers at the end of the year are held in inventory by the computer manufacturers. What is value of the investment component of GDP from these activities?
4.Suppose there is $600 million of cash in existence with $400 million of it held in bank vaults as reserves. A bank run reduces the cash held in bank vaults as reserves to $200 million when the public withdraws $200 million of cash from the banks. If the required reserve to checking deposit ratio is 25% and if banks never hold excess reserves, then the money supply will _____ as a result of the bank run. (Hint: One method of solution is to calculate the money supply both before and after the bank run.) Answer: decrease by $600 million
5.To maintain purchasing power parity, when the domestic exchange rate (as defined in the course) is growing at a rate of 5% and when the domestic inflation rate is 15%, requires a foreign inflation rate of _____ (assuming instantaneous rates of compounding).
6. Dave’s Mirror Company expects to sell $800,000 worth of mirrors while producing $900,000 worth of mirrors in the coming year. The company purchases $400,000 of new equipment during the year. Sales for the year turn out to be $700,000. Planned investment by Dave’s Mirror Company equals _____ and unplanned investment equals _______.
Answer: $500,000; $100,000
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