EC223OC - PRACTICE FINAL SOLNS TO SHORT ANSWERS FALL 2023

EC223 OC – Practice Final – Solutions to Short Answers Fall 2023 Short Answer Questions Question 41 Calculate the fixed payment on a $100 000 loan with an annual interest rate of 5 percent and 15 years to maturity. Answer: LV = FP i ( 1 − 1 ( 1 + i ) n ) ❑ 100000 = FP 0.05 ( 1 − 1 ( 1 + .05 ) 15 ) ❑ 100000 = FP 0.05 ( 1 − 1 2.078928179 ) ❑ 100000 = FP 0.05 ( 1 − 0.481017098 ) ❑ 100000 = FP 0.05 ( 0.518982902 ) ❑ 100000 0.543613054 ¿ FP 0.05 ❑ 192684.5752 = FP 0.05 ❑ 0.05 ( 192684.58 ) = FP ❑ 9634.228 = FP ❑ FP = $ 9634.23 Question 42 You believe that a corporation's dividends will grow 5 percent on average into the foreseeable future. If the company's last dividend payment was $5 what should be the current price of the 1

EC223 OC – Practice Final – Solutions to Short Answers Fall 2023 stock assuming a 12 percent required return? Answer: Use the Gordon Growth Model. $5(1 + .05)/(.12 - .05) = $75 2

EC223 OC – Practice Final – Solutions to Short Answers Fall 2023 Question 45 Suppose the Bank of Canada make a $100 million loan to the First National Bank. Discuss the effects on the balance sheets of the banking system and the Bank of Canada in the following T- accounts. Indicate whether the transaction is an asset or a liability and whether there is a plus sign ‘+” if an Also explain how this transaction affects the monetary base. Blank 1; Blank 2 Banking System Assets Liabilities Bank of Canada Assets Liabilities Blank 3; Blank 4 Answer: See Chapter 15 pages 369-370 text to complete the above -T-accounts 4

EC223 OC – Practice Final – Solutions to Short Answers Fall 2023 Question 46 In the model of the demand and supply of dollar assets use a graph to explain how a change in the foreign interest rate affects the equilibrium exchange rate. See 467 (print copy) Section 18.4 – Explaining Changes in Exchange Rates Figure 18-4 Response to an Increase in the Foreign Interest Rate i F Chapter 18 Answer: When the foreign interest rate i F rises, holding current exchange rate E t and everything else constant, the return on foreign assets rises relative to dollar assets. Thus the relative expected return on dollar assets falls. Now people want to hold fewer dollar assets, and the quantity demanded decreases at every value of the exchange rate. This can be shown by a leftward shift of the demand curve for dollar assets. The new equilibrium is reached at a point where the value of the dollar has fallen. Note you won’t have to draw a graph on the final but you can practice drawing a graph for this question to understand the concept of how a change in the foreign interest rate affects the current exchange rate. 5