EC330: Problem Set 2 Due in class:Multiple choices 1. During the financial crisis of 2008, the...

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EC330: Problem Set 2 Due in class:Multiple choices 1. During the financial crisis of 2008, the prices of U.S. Treasury securities A) rose and the price of corporate bonds declined. B) fell relative to the prices of corporate bonds. C) remained in the same relative position to the prices of corporate bonds. D) were frozen by order of the federal government. 2. As wealth decreases, which of the following is likely to account for a larger fraction of a saver’s portfolio? A) corporate stock B) corporate bonds C) U.S. government securities D) checking account balance 3. Investors value liquidity in an asset because A) liquid assets tend to have high rates of return. B) liquid assets incur lower selling costs. C) liquid assets incur lower tax liabilities. D) whereas liquid assets have high information costs, their low risk offsets this. 4. Suppose there’s an 80% chance of a stock rising by 20% and a 20% chance of it falling by 40%. What is the expected rate of return on the stock? A) -40% B) -20% C) 8% D) 16% 5. Which combination of assets represents the most diversification? A) holding corporate and Treasury bonds B) holding shares of Google and Yahoo C) holding shares of Google and Microsoft D) holding shares of Google along with Treasury bonds 6. If the expected returns on stocks rise, while the expected returns on bonds do not change, then A) the demand curve for bonds will shift to the right. 1 B) the supply curve for loanable funds will shift to the right. C) the equilibrium interest rate on bonds will fall. D) the equilibrium interest rate on bonds will rise. 7. If the government were to simultaneously cut the personal income tax and the corporate profits tax, the equilibrium interest rate on corporate bonds A) would fall. B) would rise. C) would be unaffected. D) might either rise or fall. 8. Which of the following holds under the Fisher effect, in response to an increase in expected inflation? A) nominal interest rates will go up; real interest rates will go up B) nominal interest rates will go down; real interest rates will go down C) nominal interest rates will go up; real interest rates will not change

David · Accepted Answer

1. During the financial crisis of 2008, the prices of U.S. Treasury securities: 
A) rose and the price of corporate bonds declined.
2. As wealth decreases, which of the following is likely to account for a larger fraction of a saver’s 
portfolio? 
D) checking account balance
3. Investors value liquidity in an asset because 
D) whereas liquid assets have high information costs, their low risk offsets this. 
4. Suppose there’s an 80% chance of a stock rising by 20% and a 20% chance of it falling by 40%. 
What is the expected rate of return on the stock? 
Answer : Expected rate of returns =( .80*20%) +(.20*-40%) = 8%
5. Which combination of assets represents the most diversification? 
D) holding shares of Google along with Treasury bonds because both are different asset classes
6. If the expected returns on stocks rise, while the expected returns on bonds do not change, then 
D) the equilibrium interest rate on bonds will rise.

EC330: Problem Set 2 Due in class:Multiple choices 1. During the financial crisis of 2008, the prices of U.S. Treasury securities A) rose and the price of corporate bonds declined. B) fell relative to...

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