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Econ 2035 Questions For Test 2 (Got A+ on the test)

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ECON 2035
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ECON 2035 Exam 2 Review Questions for the Stock Prices Chapter 1 What determines the maximum price wed be willing to pay for a stock the maximum dividends that we expected to get2 We said the discount rate applied to expected dividends on stocks was the sum of the interest rate on bonds and an equity risk premium a Why are stocks generally regarded as more risky than bonds because unlike bond holdersstock holders are residual and receive dividends inly after expenses are covered and because dividends are paid out of profits not fixed profits tend to fluctuateb The statement above says that the interest rate on bonds was a component of the discount rate applied to expected dividends However we know there are different types of bondsshortterm bonds and longterm bonds and government bonds and corporate bonds Which interest rate do you think is most appropriate for computing the discount ratethe interest rate on shortterm government bonds the interest rate on longterm government bonds the interest rate on shortterm corporate bonds or the interest rate on longterm corporate bonds Explain your answer Longterm corporate bonds3 We said that the equity premium was lower from the mid1980s to mid2007 during the Great Moderation than in the 1960smid1980s Explain why this was the case because output growth had little variability along with low inflation rates4 What effect would an expansionary monetary policy have on stock prices Explain Expansionary monetary policy main goal increase Aggregate Demand total spendingOpen market purchases of central bankdecrease bond supply to publicincrease in the price of bonddecrease in interest rateslowering of interest rates stimulates W and Iincrease Wincrease in Iincreases spendingdecrease discount rate applied to eePDDstitioutput riseincrease increase 5 How does technological advance affect stock prices Explain Technological advanceePDssIncrease productivityincrease profitsincreaseincrease 6 Distinguish between adaptive and rational expectations Adaptive expectations hypothesis Use only past info about a variable in forming future expectations oAdvantage AEH is simple to conductoDisadvantage Potentially useful info can be ignored current market conditionsRational expectations Hypothesis use all available infopast and currentthat is relvant to the variable being forecastoREH states expectations of a variable equal the optimal forecast of that variable based on available infoAdvantage very extensive and more likely to be accurateDisadvantage more time consuming
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