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1) False, economy will be in liquidity trap when rate of premium tumbles to 4 for every penny and cash request bend is consummately flexible. The following graph shows the money market in a hypothetical economy. The money supply is currently $200 billion, so the equilibrium interest rate is 0.5%, as shown by the grey star labeled A. (7) INTEREST RATE (Penand 015 Money Demand 01 QUANTITY OF MONEY Pillarscoolant True or False: According to the Keynesian view of the economy, this economy is currently in a liquidity trap. Suppose the Federal Reserve increases the money supply by $200 billion. Use the green line (triangle symbols) to draw the new money supply (new MS) curve. Then, use the black point (plus symbol) to indicate the new money market equilibrium. As a result of the Federal Reserve's action, the equilibrium interest rate equilibrium interest rate falls.2) The following graph shows the investment demand curve in this economy. As in the previous example, point A Indicates the initial equilibrium. Use the black point (plus symbol) to indicate the equilibrium interest rate and the level of investment that will characterize the economy following a monetary expansion. (2) INTEREST RATE Forcing 109 150 209 250 200 280 True or False: In this case, the Federal Reserve's action stimulates investment. O Tu Keynes argued that if an economy is experiencing a liquidity trap, the government should use policy to stimulate the economy. This will shift the curve to the Yes, Fed activity fortifies investment.50, explanation is valid. Financial strategy Cash request bend or the total interest Of venture bend (as the choice specify yet particular to the inquiry the answer ought to be Money request bend) right.32. If the economy is suffering from a recessionary gap, the Fed should conduct monetary policy by the money supply. A) expansionary; decreasing B) expansionary, increasing C) contractionary; decreasing D) contractionary; increasing 33. A reduction in interest rates due to an increase in the money supply will shift: A) aggregate demand to the left. B) aggregate demand to the right. C) short-run aggregate supply to the left. D) short-run aggregate supply to the right. 34. In the long run, an increase in the quantity of money: A) increases real output. B) increases prices causing inflation but not long-run output. C) increases real interest rates and real production output. D) has no impact on output or prices in the economy. 35. If at the current interest rate, the demand for money is $300 billion and the supply of money is $200 billion, then the interest rate will A) fall. B) rise. C) remain unchanged. D) be in equilibrium. 36. When compared to fiscal policy, monetary policy is: A) quicker and easier to implement. B) slower and more cumbersome to implement. C) more dependent on Congressional approval. D) more likely to produce an offsetting net export effect. 37. Other things equal, a tight monetary policy during a period of demand pull inflation will: A) lower the interest rate and increase investment, and real output. B) lower the price level and increase investment, and GDP. C) increase productivity, aggregate supply, and real output. D) increase the interest rate, reduce investment, and reduce aggregate demand. 38. Monetary policy affects GDP and the price level by: A) changing aggregate supply. B) changing aggregate demand. C) changing the aggregate amount of labor supplied in the market. D) changing fiscal policy. 39. Expansionary monetary policy increases all of the following except A) aggregate demand. B) government spending. C) consumption spending. D) investment spending.Sora Industries has 68 million outstanding shares, $126 million in debt, $54 million in cash, and the following projected free cash flow for the next four years: Year 2 3 Earnings and FCF Forecast ($ million) Sales 433.0 468.0 516.0 547.0 574.3 2 Growth vs. Prior Year 8.1% 10.3% 6.0% 5.0% 3 Cost of Goods Sold (313.6) (345.7) (306.5) (384.8) 4 Gross Profit 154.4 170.3 180.5 180.5 5 Selling, General, & Admin. (93.6) (103.2) (109.4) (114.9) Depreciation (7.0) (7.5) (9.0) (9.5) 7 EBIT 53.8 50.6 62.1 65.2 8 Less: Income Tax at 40% (21.5) (23.8) (24.8) (26.1) a. Suppose Sora's revenue and free cash flow are expected to grow at a 4.7%% rate beyond year four. If Sora's weighted average cost of capital is 13.0%%, what is the value of Sora sock based on this information? The stock price for this case is $ ]. (Round to the nearest cont.) 8 Loss: Income Tax at 40% (21.5) (23.8) (24.8) (26.1) 0 Plus: Depreciation 7.0 10 Less: Capital Expenditures (7.7) (10.0) (9.9) (10.4) 11 Loss: Increase in NWC (6.3) (8.6) (5.6) (4.9) 12 Free Cash Flow 25.3 24.6 30.8 33.3 a. Suppose Sora's revenue and free cash flow are expected to grow at a 4.7%% rate beyond year four. If Sora's weighted average cost of capital is 13.0%%, what is the value of Sora stock based on this information? b. Sora's cost of goods sold was assumed to be 67% of sales. If its cost of goods sold is actually 70% of sales, how would the estimate of the stock's value change? c. Roturn to the assumptions of part (a) and suppose Sora can maintain its cost of goods sold at 67%% of sales. However, the firm reduces its selling, general, and administrative expenses from 20% of sales to 16% of sales. What stock price would you estimate now? (Assume no other expenses, except taxes, are affected.) d. Sora's net working capital needs were estimated to be 18% of sales (their current level in year zero). If Sora can reduce this requirement to 12% of sales starting in year 1, but all other assumptions are as in (a). what stock price do you estimate for Sora? (Hint: This change will have the largest impact on Sora's free cash flow in year 1.) a. Suppose Sora's revenue and free cash flow are expected to grow at a 4.7%% rate beyond year four. If Sora's weighted average cost of capital is 13.0%, what is the value of Sora stock based on this information? The stock price for this case is $ . (Round to the nearest cent.)Exercise 8.13 Consider a competitive, price-taking firm that confronts one of the following two situations: . "uncertainty": price p is a random variable with expectation p. . "certainty": price is fixed at p. It has a cost function C(q) where q is output and it seeks to marimise the expected utility of profit. 1. Suppose that the firm must choose the level of output before the particular realisation of p is announced. Set up the firm's optimisation problem and derive the first- and second-order conditions for a marimum. Show that, if the firm is risk averse, then increasing marginal cost is not a necessary condition for a maximum, and that it strictly prefers "certainly" to "un- certainty". Show that if the firm is risk neutral then the firm is indifferent as between "certainty" and "uncertainty". 2. Now suppose that the firm can select q after the realisation of p is an- nounced, and that marginal cost is strictly increasing. Using the firm's competitive supply function write down profit as a function of p and show that this profit function is conver. Hence show that a risk-neutral firm would strictly prefer "uncertainty" to "certainty"