Chapter 7
1. A small country’s gross domestic product (GDP) is $12 million.
a. If government expenditures amount to $7.5 million and gross
private domestic investment is $5.5 million, what will be the
amount of net exports of goods and services?
3. Personal income amounted to $17 million last year. Personal
current taxes amounted to $4 million, and personal outlays for
consumption expenditures, nonmortgage interest, and so forth were
$12 million.
a. What was the amount of disposable personal income last year?
b. What was the amount of personal saving last year?
c. Calculate personal saving as a percentage of disposable
personal income.
5. The components that comprise a nation’s gross domestic product
(GDP) were identifi ed and discussed in this chapter. Assume the
following accounts and amounts were reported by a nation last year.
Government expenditures (purchases of goods and services) were
$5.5 billion; personal consumption expenditures were $40.5 billion;
gross private domestic investment amounted to $20 billion; capital
consumption allowances were $4 billion; personal savings were estimated
at $2 billion; imports of goods and services amounted to $6.5
billion; and the exports of goods and services were $5 billion.
a. Determine the nation’s gross domestic product (GDP).
b. How would your answer change if the dollar amounts of
imports and exports were reversed
7. A nation’s gross domestic product (GDP) is $600 million. Its
personal consumption expenditures are $350 million, and government
expenditures are $100 million. Net exports of goods and
services amount to $50 million.
a. Determine the nation’s gross private domestic investment.
b. If imports exceed exports by $25 million, how would your
answer to (a) change
9. A country in Southeast Asia states its gross domestic product
(GDP) in terms of yen. Assume that last year its GDP was 50 billion
yen when one U.S. dollar could be exchanged for 120 yen.
a. Determine the country’s GDP in terms of U.S. dollars for last
year.
b. Assume the GDP increases to 55 billion yen for this year,
while the dollar value of one yen is now $0.01. Determine the
country’s GDP in terms of U.S. dollars for this year.
c. Show how your answer in (b) would change if one U.S. dollar
could be exchanged for 110 yen.
Chapter 8.
3. A ten-year U.S. Treasury bond has a 3.5 percent interest rate, while
an identical maturity corporate bond has a 5.25 percent interest rate.
Real interest rates and infl ation rate expectations would be the same
for the two bonds. If a default risk premium of 1.50 percentage points
is estimated for the corporate bond, determine the liquidity premium for the corporate bond.
5. 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 2.5 percent.
A maturity risk premium (MRP) is estimated to be 0.2 percentage
points for the longer maturity bond. Investors expect infl ation to
average 1.5 percentage points over the next ten years.
a. Estimate the expected real rate of return on the ten-year U.S.
Treasury bond. b. If the real rate of return is expected to be the same for the
thirty-year bond as for the ten-year bond, estimate the average
annual infl ation rate expected by investors over the life of
the thirty-year bond.
7. Infl ation is expected to be 3 percent over the next year. You desire
an annual real rate of return of 2.5 percent on your investments.
a. What nominal rate of interest would have to be offered on a
one-year Treasury security for you to consider making an
investment?
b. A one-year corporate debt security is being offered at 2
percentage points over the one-year Treasury security rate
that meets your requirement in (a). What would be the nominal
interest rate on the corporate security?
11. Assume that the interest rate on a one-year Treasury bill is 6
percent. and the rate on a two-year Treasury note is 7 percent.
a. If the expected real rate of interest is 3 percent, determine the
infl ation premium on the Treasury bill.
b. If the maturity risk premium (MRP) is expected to be zero,
determine the infl ation premium on the Treasury note.
c. What is the expected infl ation premium for the second year?
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 infl ation is expected to average 7 percent over the fi rst four
years, what is the expected real rate of interest?
b. If the infl ation rate is expected to be 5 percent for the fi rst
year, calculate the average annual rate of infl ation for years 2
through 4.
c. If the maturity risk premium (MRP) is expected to be zero
between the two Treasury securities, what will be the average
annual infl ation rate expected over years 5 through 8?