CAPM essay
CAPM essay
In the second scenario BBBY would use its $400 million in excess cash and borrow the remaining funds until
Question 2
a) We will need to calculate the debt-to GDP ratio for each year separately in order to compute the total accumulation.
The following equations and variables are used in question a)
Year 1
Year 2
Year 3
Year 4
Year 5
Therefore, after 5 years the debt-to-GDP ratio will be equal to 104,8 % (rounded to one decimal)
b) The debt is not sustainable. The criteria to test whether debt is sustainable is as follows:
Plotting in the known variables results in the following:
Solving for b gives the following:
Therefore, the initial debt should be -200% (so surplus) in order to maintain a sustainable debt.
c) If the nominal interest rate rises to 10%, it would imply that the real interest rate is as follows:
Therefore, we know that:
The criteria to maintain a sustainable debt is as follows:
This implies that
Solving for inflation results in the following:
The conclusion is thus that debt in this scenario will only remain sustainable if the real rate of interest is negative (since the rate of inflation is higher that the nominal interest rate).
d) I believe the question is rather whether both policies could cooperate, which according to me is not possible since fiscal policy is usually directed at increasing output and income whereas the primary goal of monetary policies is to maintain a low level of inflation. Therefore, both policies cannot cooperate.
A dummy variable is a variable that takes on two values, usually 0 or 1.
I avoid here the notation N for sample size, which you know from your statistics course. There, N is reserved for population size. Usually the population size is not defined (we simple do not know it). In many economic publications N is used as the sample size.
What a histograms does is count the number of observations in
In the second scenario BBBY would use its $400 million in excess cash and borrow the remaining funds until
Question 2
a) We will need to calculate the debt-to GDP ratio for each year separately in order to compute the total accumulation.
The following equations and variables are used in question a)
Year 1
Year 2
Year 3
Year 4
Year 5
Therefore, after 5 years the debt-to-GDP ratio will be equal to 104,8 % (rounded to one decimal)
b) The debt is not sustainable. The criteria to test whether debt is sustainable is as follows:
Plotting in the known variables results in the following:
Solving for b gives the following:
Therefore, the initial debt should be -200% (so surplus) in order to maintain a sustainable debt.
c) If the nominal interest rate rises to 10%, it would imply that the real interest rate is as follows:
Therefore, we know that:
The criteria to maintain a sustainable debt is as follows:
This implies that
Solving for inflation results in the following:
The conclusion is thus that debt in this scenario will only remain sustainable if the real rate of interest is negative (since the rate of inflation is higher that the nominal interest rate).
d) I believe the question is rather whether both policies could cooperate, which according to me is not possible since fiscal policy is usually directed at increasing output and income whereas the primary goal of monetary policies is to maintain a low level of inflation. Therefore, both policies cannot cooperate.
A dummy variable is a variable that takes on two values, usually 0 or 1.
I avoid here the notation N for sample size, which you know from your statistics course. There, N is reserved for population size. Usually the population size is not defined (we simple do not know it). In many economic publications N is used as the sample size.
What a histograms does is count the number of observations in