Homework answers / question archive / A Consider the Solow growth model (where the saving rate is exogenously fixed)

A Consider the Solow growth model (where the saving rate is exogenously fixed)

Business

Share With

---

A

Consider the Solow growth model (where the saving rate is exogenously fixed). The production function is y = f(k) = Akα for some α ∈ (0, 1). The saving rate is s ∈ (0, 1), the depreciation rate is δ = 0, the rate of exogenous technological change is g = 0, and the rate of population growth is n > 0. (i) Suppose that congress passes a new law on immigration that lowers the inflow of immigrants. As a result, the rate of population growth falls from n to n new, where 0 < nnew < n. For simplicity, suppose that this change happens instantaneously and will last for ever. Suppose further that the economy was in steady state before this change. What is the long-run impact of the new law on the steady-state levels of per-head capital (k), income (y), the wage rate (w), and the interest rate (r)? Who benefits from the law, the workers or the capital owners? (ii) Now suppose that, in addition to the aforementioned reduction in n, the law restricts some talented immigrants from entering the country. As a result, aggregate total factor productivity falls from A to Anew, where 0 < Anew < A. How does this additional change affect your answer to the previous question? (Hint: you can first abstract from the change in n, explain the implications of the change in A, and then combined the two cases intuitively

 

1. Randy Corporation has a capital budget of 324.0 and and a Net Income of 18.0. If Randy's target equity fraction is 0.1, what should Randy's dividend be under the residual dividend model.

 

2. Due to a declining stock price and the possibility of being delisted from an exchange, Hubbell corporation undergoes a reverse 5 to 1 stock split. If Hubbell initially has 490 shares, how many shares does Hubbell will have now.

 

3. Spraggins Inc. has a new capital budget for next year of 911,000 and has a target debt fraction of 0.25. If the  firm following the residual dividend policy and wants to retain its target capital structure, what is its retained earning be next year.

 

4. Ebeling Inc. undergoes a 5 for 1 stock split.  If the company's stock trades for 214 dollars per share before the split and the value of the company does not change due to the split, what is Ebeling's new stock price.

 

5. A firm has equity with market value $100 million and debt with market value at $70 million. The debt pays perpetual expected coupons of $3.5 million annually.

The above numbers are prior to a stock buyback being announced.

The firm uses some of its cash buyback stock on of $20 million. As a result of the fall in its cash, the expected coupon payment to debt reduce to $3.4 million (expected payments is the probability weighted future coupons, and the probability that in some future states of the world the firm would default has increased due to the the stock buyback). Also the rate of discount Rd for expected coupons paid to debt rises to 5.15%.

 

 

Group Exercise:

1.     Make sure you understand the money creation process.

2.     Go through the steps again but this time suppose the RR = 10% and the initial ? demand deposits into Bank A is $50,000. 

a.     What is the ? ER for Bank A?

 

b.     If the loaned amount from Bank A is deposited into Bank B, what is the ? ER for Bank B?

 

c.     If the loaned amount from Bank B is deposited into Bank C, what is the ? ER for Bank C?

 

d.     What is the maximum potential increase in money supply?

 

e.     We note that the money supply could potentially increase by the amount calculated in part d above. What would prevent the money supply from reaching the potential maximum? Hint: look up the term leakages in the money creation process or just think through what needs to happen for the money supply to increase and what are things that could happen to stop it.

 

 

 

 

3.     This next activity you will submit for your in-class grade. We're going to be discussing monetary policy in more detail next class but this will provide a nice introduction to that module. Just like fiscal policy, monetary policy (actions by the Federal Reserve) can be either contractionary or expansionary. Where contractionary monetary policy would try to decrease the money supply and expansionary monetary policy would try to increase money supply By now you should understand that the money creation process in banks is a key part of increasing or decreasing the money supply. So why does it matter if the money supply changes? Consider the money market, the price of money is interest rates so the graph would look something like this:

4.     If the money supply increases, interest rates fall. If interest rates fall, that encourages spending by households (C) and businesses (I) which would increase AE which increases AD which causes the price level to increase (inflation) and GDP (output) to increase (unemployment goes down). The opposite would hold for contractionary monetary policy.

5.     Use the link below to visit the Board of Governors of the Federal Reserve website and read the latest Federal Open Market Committee (FOMC) statement which discusses the current type of monetary policy which the Federal Reserve is implementing:

 

http://www.federalreserve.gov/monetarypolicy/default.htm

 

6.     Read the minutes from the FOMC meeting and discuss them with your group. Individually email your instructor a one-page summary of your findings, answering the questions below:

a.     Is the Federal Reserve implementing expansionary or contractionary monetary policy? 

 

b.     What details make you believe that is the monetary policy they are implementing?

 

c.     Why are they implementing that monetary policy?

 

d.     How do you think that the Federal Reserve's changes to monetary policy will impact the condition of the U.S. economy?

 

e.     Will this be an effective policy given the current fiscal policy that the Federal Government has enacted?

 

A Canadian company exports goods to Chile. The goods will be shipped from Canada immediately, but the Chilean importer is given a six-month credit period. The value of the goods sold is CLP3 million.

Additional Information

CAD/CLP spot rate                                                629.6700
Forecast spot CAD/CLP (in six months)                629.6850
Option premium cost                                              2%
Option strike price (equal to spot rate)                   629.6700
 

If the forecast is correct, how many CAD would the Canadian exporter receive if the company decided to bear the risk for the six-month period? (1 mark) 
If the exporter decided to purchase an option, would the company purchase a CLP call option or a CLP put option? Provide an explanation for your answer. (2 marks) 
Assuming the exporter purchased an appropriate option at a strike price of CAD/CLP 629.6700, and after six months the CAD/CLP spot rate was 629.6550, would the exporter exercise the option or not? Explain your answer. How much (in CAD) would the exporter receive as a result of this total export transaction? (3 marks)

 

[3:13 AM, 3/9/2022] flo: Questions:

 

1 Using the same Solver techniques, what would be the weighting of WFC in the "optimal risk portfolio" on the efficient frontier formed by WFC and MSFT?

2. Refer to step 3.3.  In the "unconstrained" or "short sale" version of the optimal risk portfolio, what is the weighting of XOM?

3. Refer to step 3.3. In the "constrained" or "long only" version of the optimal risk portfolio, what is the GOOG weighting?

4. Refer to step 3.3.  In the "unconstrained" or "short sale" version of the optimal risk portfolio, what is the portfolio mean?

5. See step 3.3.  In the "constrained" or "long-only" version of the optimal risk portfolio, what is the standard deviation of the portfolio?

6. See step 3.3. In the "unconstrained" or "short" version of th...
[3:14 AM, 3/9/2022] flo: Question:
Client has a net worth in excess of $3.5 million - they're considering purchasing $75,000 worth of a fund, however they want to know if they should borrow an additional $52,500 from their Home Equity Line of Credit and service the 3% simple interest while they own the investment, allowing them to buy $127,500 worth of the fund.

 

No Leverage (Best Case)

Interest Income after Tax $10,800.00

Capital Gain After Tax      $28,752

Return on Investment        52.74%

 

No Leverage (Worst Case)

Interest Income After Tax   $10,800.00

Capital Loss                        -$23,025.00

Return on Investment         -16.30%

 

Leverage (Best Case)

Interest Income After Tax  $585.00

Capital Gain After Tax        $48,878.40

Return on Investment         65.95%

 

Leverage (Worst Case)

Interest Income After Tax   $585.00

Capital Loss                         -$39,142.50

Return on Investment         -51.41%

 

Should the individual make this investment? Should they include leverage in the investment mix? Justify using qualitative and quantitative reasoning

 

[2:50 AM, 3/9/2022] flo: Question:
3) Supply and Demand

Please read the article entitled "Oil Prices Fall as Investors Fear Less Demand" and answer the following questions.

According to the article and our class notes, what do you think could have been causing the rise in the supply of oil? Please explain your answer.
According to the article and our class notes, what do you think could have been causing the fall in demand for oil? Please explain your answer.
Based upon the noted effects upon the supply and demand for oil, what do you think will happen to the price for oil? (Please use graphs to support your answer).
4) Demand Analysis

Please read the article entitled "Obama's poor tax" and answer the following questions. According to the article, what is the elasticity of demand...
[3:12 AM, 3/9/2022] flo: Question:
1. Randy Corporation has a capital budget of 324.0 and and a Net Income of 18.0. If Randy's target equity fraction is 0.1, what should Randy's dividend be under the residual dividend model.

 

2. Due to a declining stock price and the possibility of being delisted from an exchange, Hubbell corporation undergoes a reverse 5 to 1 stock split. If Hubbell initially has 490 shares, how many shares does Hubbell will have now.

 

3. Spraggins Inc. has a new capital budget for next year of 911,000 and has a target debt fraction of 0.25. If the  firm following the residual dividend policy and wants to retain its target capital structure, what is its retained earning be next year.

 

4. Ebeling Inc. undergoes a 5 for 1 stock split.  If the company's stock trades for 214 dollars per share before the split and the value of the company does not change due to the split, what is Ebeling's new stock price.

 

5. A firm has equity with market value $100 million and debt with market value at $70 million. The debt pays perpetual expected coupons of $3.5 million annually.

The above numbers are prior to a stock buyback being announced.

The firm uses some of its cash buyback stock on of $20 million. As a result of the fall in its cash, the expected coupon payment to debt reduce to $3.4 million (expected payments is the probability weighted future coupons, and the probability that in some future states of the world the firm would default has increased due to the the stock buyback). Also the rate of discount Rd for expected coupons paid to debt rises to 5.15%.