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San K.

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Economics

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Question:

What is the intuition behind the notion of Ricardian equivalence? How might you look for evidence to test the suggestion that people account for future generations’ tax burdens by saving more today?

San K.

Answer:

According to the theory of Ricardian equivalence, whenever there is a deficit, the current generation realizes that it is paying less in taxes than is being spent by the government. They realize that this will result in a heavier tax burden on future generations than there would be if they were paying enough taxes to balance the current budget. To reduce this inter-generational inequity, the current generation saves more than they would if their taxes were higher. This will mean that children will inherit the means to pay higher taxes later. If this theory were accurate, individuals would respond to lower taxes (for the same levels of government expenditures) by raising their savings rate. To investigate whether the theory is accurate, then, one could look at how private savings rates have changed when new tax cuts (or tax increases) were passed.

Statistics

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Question:

Consider a Telephone operator who, on average, handles 5 calls every 3 minutes. What is the probability that there will be no call in the next minute ?At lest two calls ?

San K.

Answer:

IF we let X = Number of calls in a minute., than X has a Poisson distribution with EX = $$\lambda$$ = $$\frac{5}{3}$$ So P(No calls in next minute) = P(X=0) = $$\frac{e^{\frac{-5}{3}}*\frac{5}{3}^{0}}{0!}$$ =$$e^{\frac{-5}{3}}$$ =0.189 P(At least two calls in next minute ) = P(X$$\geq$$2) = 1-P(X=0)-P(X=1) = 1-0.189- $$\frac{e^{\frac{-5}{3}}*\frac{5}{3}^{1}}{1!}$$ =0.496

Finance

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Question:

At what price would we expect a $1,000 Treasury bill to be trading in the market with 84 days to maturity and a 7% discount yield to maturity?

San K.

Answer:

To calculate the price of zero-coupon Treasury bills or any non interest bearing security, we $$P = F [1 - (\frac{(R * D_{M}) }{ 360})]$$ P = Current price of the security F = Face value of the security $$D_{M}$$ = Number of days until the security matures R = Discount yield (yield to maturity) Here $$D_{M}=84$$ R=.07 P = $1,000 [1 - ((0.07 x 84) / 360)] P = $1,000 [1-0.0163] P = $983.7 We would expect the bill to sell for $983.7 in the bond market.

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