Question

a. Supposed you have savings in your bank account earning 5% interest per year. You are thinking about buying a stock with an expected price of AED 150 in one year and with an expected earning per share of AED 10 in one year. If you offer to pay maximum AED 150 for that share of stock today, other things equal, will you be at least earning your opportunity cost? Enter your calculations and explain your result in no more than 3 sentences. True, False, Why? b. The Neo-Keynesian Macro-Model argues that monetary policy is effective in influencing production (output), and employment in the short-run. Justify your answer in no more than 3 sentences.

Answer 1

Solution

a. Expected Price of the Stock in one year is AED 150

Present Maximum Price willing to spend to purchae the stock is AED 150

Here I have money in my savings account which is earning 5% p.a

My Opportunity cost is investing in the stock that has an earnings of AED 10 over an year

Rate of expected return on stock is : (10 / 150) * 100 i.e., 6.66% which is more than that earned through my money in my savings account.

So,I am not earning my opportunity cost

b.True

Monetary policy is effective in influencing the production and employment in the short-run.Monetary policy is the control of money supply in an economy.Controlling the money supply will influence the aggregate demand in the economy which leads to changes in the production and employment levels in an economy.

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