In period t, the economy is described by the IS-LM model: IS: Y = 100 1000it...
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In period t, the economy is described by the IS-LM model: IS: Y = 100 1000it LM: Y = 60+ 1000i, That is, equilibrium output and interest rate for period t can be solved for by the above two equations. Company M&B's stock pays dividends using the formula: Vt That is, Company M&B pays an amount of dividend in each period equal to half of the output in that period. The stock price V₂ for Company A comes from the present value formula: E₂Dt+1 1+r₂ De = + 0.5Yt, Dt+1 = 0.5Yt+1/ E₁Dt+2 EDt+3 (1+r₂) (1 + Ert+1) ™ (1+r;)(1 + E£Tt+1)(1 + E£Tt+3) + .. The discount rate r, is equal to the sum of the interest rate it and a risk premium p, which we assumed to be a constant of 1%. Assume that there is no inflation and there is no distinction between real and nominal values. a) Suppose people do not expect the IS curve or LM curve to move anytime in the future. Calculate the stock price for Company M&B in period t. b) Suppose people expect expansionary monetary policy starting from period t + 1, with the LM curve shifts to: Yt+1 = 80 + 1000it+1 And, people expect the shift to be permanent, i.e. the LM curve is expected to be the one above for t + 2,t + 3,.... On the other hand, the IS curve is expected to be the same as the one used in a) for all future periods. Calculate the stock price for Company M&B in period t. c) Suppose people do not expect any of the curve to shift, but people worry about the future and require a higher risk premium p of 2% instead, for all periods from t and beyond. Calculate the stock price for Company M&B in period t. In period t, the economy is described by the IS-LM model: IS: Y = 100 1000it LM: Y = 60+ 1000i, That is, equilibrium output and interest rate for period t can be solved for by the above two equations. Company M&B's stock pays dividends using the formula: Vt That is, Company M&B pays an amount of dividend in each period equal to half of the output in that period. The stock price V₂ for Company A comes from the present value formula: E₂Dt+1 1+r₂ De = + 0.5Yt, Dt+1 = 0.5Yt+1/ E₁Dt+2 EDt+3 (1+r₂) (1 + Ert+1) ™ (1+r;)(1 + E£Tt+1)(1 + E£Tt+3) + .. The discount rate r, is equal to the sum of the interest rate it and a risk premium p, which we assumed to be a constant of 1%. Assume that there is no inflation and there is no distinction between real and nominal values. a) Suppose people do not expect the IS curve or LM curve to move anytime in the future. Calculate the stock price for Company M&B in period t. b) Suppose people expect expansionary monetary policy starting from period t + 1, with the LM curve shifts to: Yt+1 = 80 + 1000it+1 And, people expect the shift to be permanent, i.e. the LM curve is expected to be the one above for t + 2,t + 3,.... On the other hand, the IS curve is expected to be the same as the one used in a) for all future periods. Calculate the stock price for Company M&B in period t. c) Suppose people do not expect any of the curve to shift, but people worry about the future and require a higher risk premium p of 2% instead, for all periods from t and beyond. Calculate the stock price for Company M&B in period t.
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Answer rating: 100% (QA)
a The stock price for Company MB in period t is V E05Yt1 1 r E05Yt2 1 r2 E05Yt3 1 r3 The expected va... View the full answer
Related Book For
Macroeconomics
ISBN: 978-1464168505
5th Canadian Edition
Authors: N. Gregory Mankiw, William M. Scarth
Posted Date:
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