Intermediate MacroEcomomics

Put yourself in the shoes of the Chairman of the Federal Reserve in year 1998. The economy is booming and stock prices are rising. We start with the analysis of the stock market. Assume that real earnings (real divi- dends) of U.S. rms in year 0 are Do and they grow at an annual rate 9. Investors discount future dividends using the real interest rate R > g. It can be shown that the present discounted value of the sum of dividends, denoted by PDV, is equal to 1+R Rg' PDV = D0 Question 2.1 [5 points] Show that the present discounted value of future dividends is increasing in the dividend growth rate. I Question 2.2 [5 points] Show that the present discounted value of future dividends is decreasing in the real interest rate R