Question

Prob 7-1 A very small country’s gross domestic product is $12 million. Answer in the green shaded cells below



a. If government expenditures amount to $7.5 million and gross private domestic investment is $5.5 million, what

would be the amount of net exports of goods and services?



Prob 7-2 How would your answer change in Problem 1 if the gross domestic product had been $14 million?



Prob 8-1 Assume investors expect a 2.0 percent real rate of return over the next year. If inflation is expected to be 0.5 percent, what is the Answer in the green shaded cells below

expected nominal interest rate for a one-year U.S. Treasury security?



Expected nominal interest rate



Prob 8-4 A thirty-year U.S. Treasury bond has a 4.0 percent interest rate. In contrast, a ten-year Treasury bond has an interest rate of 3.7 percent.

If inflation is expected to average 1.5 percentage points over both the next ten years and thirty years, determine the maturity risk premium

for the thirty-year bond over the ten-year bond.



Maturity risk premium



Prob 8-6 You are considering an investment in a one-year government debt security with a yield of 5 percent or a highly liquid corporate debt

security with a yield of 6.5 percent. The expected inflation rate for the next year is expected to be 2.5 percent.



a. What would be your real rate earned on either of the two investments?



real rate earned



b. What would be the default risk premium on the corporate debt security?



default risk premium





Prob 8-12 A Treasury note with a maturity of four years carries a nominal rate of interest of 10 percent. In contrast, an eight-year Treasury

bond has a yield of 8 percent.



a. If inflation is expected to average 7 percent over the first four years, what is the expected real rate of interest?



Expected real rate of interest



b. If the inflation rate is expected to be 5 percent for the first year, calculate the average annual rate of inflation for years 2 through 4.



Average annual rate for years 2, 3, and 4



c. If the maturity risk premium is expected to be zero between the two Treasury securities, what will be the average annual

inflation rate expected over years 5 through 8?



Expected average annual inflation rate for years 5, 6, 7, and 8
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