Economics homework， due 10/26

Requirements

For essay questions, briefly answer each with a paragraph or two.

Each paragraph should contain a minimum of three sentences.

Yes and no answers are not acceptable.

1. Consider the following information on the stock market in a small economy. (LO2)

a. Compute a price-weighted stock price index for the beginning of the year and the end of the year. What is the percentage change? (10 points)

b. Compute a value-weighted stock price index for the beginning of the year and the end of the year. What is the percentage change? (10 points)

2. To raise wealth and stimulate private spending, suppose the central bank lowers interest rates, making stock market investment relatively attractive.

Which stock market index would you monitor to judge the effectiveness of the policy: the Dow Jones Industrial Average or the S&P 500? Why?

3. Suppose you see evidence that the stock market is efficient. Would that make you more or less likely to invest in stocks for your 401(k) retirement plan when you get your first job?

4. How do venture capital firms, which specialize in identifying and financing promising but high-risk businesses, help the economy grow?

5. If Professor Siegel is correct that stocks are less risky than bonds, then the risk premium on stock may be zero. Assuming that the risk-free interest rate is 2½ percent, the growth rate of dividends is 1 percent and the current level of dividends is $70, use the dividend-discount model to compute the level of the S&P 500 that is warranted by the fundamentals. Compare the result to the current S&P 500 level, and comment on it.