Consider the following:
(i) Describe the indifference curves that are used to represent homothetic preferences.
(ii) Assume preferences are homothetic and consider the representative agent. Suppose a technological advance increases people's current and future endowments. Under what circumstances would the technological advance have no effect on the interest rate? Under what circumstances would the technological advance cause an increase in the interest rate? Explain.
(i) When preferences are homothetic, the indifference curves all have the same slope along any ray from the origin.
(ii) The interest rate will remain unchanged if the technological advance raises current and future endowments by the same percentage. In this case, the new and old endowment points will lie on the same ray from the origin, and the slope of the representative agent's indifference curve-and hence the equilibrium interest rate-will not change. The interest rate will rise if the technological advance raises future endowments by a greater percentage than it raises current endowments. In this case, the new endowment point will lie above the ray from the origin containing the old endowment point. The representative agent's indifference curves are steeper for baskets lying above the ray, so the equilibrium interest rate must rise.
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A. the monetarist view. B. the rational expectations theory. C. the mainstream view. D. the real business cycle theory.
Excess volatility refers to
A) the unwillingness of financial analysts to consistently recommend the same stocks. B) the greater volatility of futures prices compared to the volatility of prices of the underlying assets. C) the tendency for stocks with high rates of returns also to have quite variable returns. D) the larger movements in market prices of stock than in their fundamental values.
Jason buys only music downloads and food with his weekly income. In response to a decrease in the price of downloads, he buys more downloads and less food. As a result, we would expect: a. the marginal utility of downloads to increase and the marginal utility of food to decrease. b. the marginal utility of both downloads and food to remain unchanged
c. the marginal utility of downloads to decrease and the marginal utility of food to increase. d. the marginal utility of food to become negative.
The yield curve is the relationship between the:
a. Domestic yield and foreign yield. b. Real yield (i.e., interest rate) and actual inflation. c. Nominal yield and time to maturity of a security. d. Nominal yield on corporate securities and the yield of government securities. e. Nominal yield and real yield of a security.