What is arbitrage? Explain why arbitrage drives the contract price of futures to the price of the underlying asset on the expiration date, for prices above and below the asset price
What will be an ideal response?
Arbitrage is the riskless elimination of profit opportunities in futures markets. If the contract price is 111, and the asset price is 110, contracts will be sold at $111,000 and the asset purchased for $110,000. The bonds will be purchased at the market price and delivered to fulfill the contract, for a profit of $1000. This will continue until the contract price falls to equal the asset price. Similarly, if the contract price is 109, and the asset price is 110, everyone will buy the contract, and sell the bond for $110,000 after buying it for $109,000 on the market, for a profit, again, of $1,000. This activity will drive up the bond price and drive down the asset price until they are equal.
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What do we mean by "property rights" and why are they important?
What will be an ideal response?
Laissez-faire proponents contend that the government can serve a valuable role in encouraging firms to engage in research and development by creating a patent system
Indicate whether the statement is true or false
Economic growth depends on
A. increases in the capital stock as a result of saving. B. high rates of consumption. C. high government spending. D. low tax rates.
Irving Fisher argued for a tax on consumption instead of on income because
A. the standard of living depends not on income, but on how much is consumed. B. consumption is the best indication of ability to pay. C. a tax on consumption raises more revenue than a tax on income. D. a tax on income discourages saving by taxing savings twice.