1 True or false? For each of the following statements, decide whether it is true or false, and explain your answer in at most two sentences using the material you learned in the course. No points will be given without an appropriate explanation! Question 1.1 The arbitrage equation can only hold in an economy in which returns are not taxed. Question 1.2 Imagine an economy with two investors. Investor 1 can only invest into a savings account while investor two can only invest into capital, and the two investors cannot trade with each other. Then the arbitrage equation equalizing the returns on the savings account and the return on capital still holds. Question 1.3 The user cost of capital also reflects changes in the price of capital. Question 1.4 The price-dividend ratio is high when the dividend growth rate is high because prices and dividends have to grow at the same rate. Question 1.5 When we look at empirical evidence, we can observe that poor countries catch up but only when we focus on countries that follow sensible economic policies. Question 1.6 A plausible model of capital depreciation for a factory is one where one machine depreciates (is destroyed) every year, regardless how big the factory is