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According to the short-run Phillips curve, which of the following will occur when the SARB increases
the money supply?
A. Both the unemployment rate and the inflation rate will increase.
B. Both the unemployment rate and the inflation rate will decrease.
C. The unemployment rate will decrease.
D. The inflation rate will decrease.
Suppose the economy is initially at its long run equilibrium. If the nominal money supply increases,
which of the following is a correct statement regarding how the economy will respond in the short-
run?
A. The unemployment rate will decline below the natural rate.
B. The economy will experience cost push inflation since firms face a higher cost of borrowing.
C. The unemployment rate will rise above the natural rate and inflation will fall.
D. The natural rate of unemployment will fall and the economy will experience demand pull
inflation
The long run Phillips curve shifts to the left when:
A. the aggregate demand curve shifts to the right.
B. there is a fall in inflation expectations.
C. there is a rise in inflation expectations.
D. technology and human capital increases.
Directions: Research on the following financial analysis tools and give examples:
- Horizontal Analysis of FS
the composition of your consumption in terms of each of the major categories listed in Table 21-1.
i. Solve the equilibrium price and quantity.
iii. Government officials fear that too much venison is being consumed at the market equilibrium, leading to concerns about population of deer. In response the government imposes a tax of RM2 on the producers of venison. Solve a new equilibrium after tax.
iii. Plot a new graph to show the movement of equilibrium price and quantity before and after tax.
iv. Calculate consumer and producer burden. Who will absorb most of the tax?
You are a financial advisor at XYZ Stock Broking firm. Calculate the return as per CAPM for following company’s stock, identify whether the stocks are undervalued, overvalued or correctly priced and advise accordingly. Returns of T- Bill is 7%.
Stock Expected Return Beta
Tata 21% 1.7
Adani Power 16% 1.4
Ranbaxy 23% 1.1
PNB 19% 1.2
Sensex 18%
LT India Ltd has the following capital structure, which it considers optimal:
Debt 35%
Equity shares 65%
Total 100%
Applicable tax rate for the company is 25%. Risk free rate of return is 6%, average equity market investment has expected rate of return of 12%. The company’s beta is 1.10. Debt will bear an interest rate of 9% p.a.
Calculate
a. component cost of debt and equity shares assuming that the company does not issue any additional equity shares.
b. Weighted Average Cost of Capital (WACC).
