1. Multiple Choice Question

1.A Assume that a Peruvian company, DMB LLC, just reported its earnings this year (year 0).

The reported revenue was $9 million and the reported cost was $10 million. Its revenue is

expected to grow 6% annually, while its cost is expected to grow 2% annually. Mark ALL

the CORRECT statements. For this question, profit revenue - cost. First, apply the

Gordon Formula to calculate the present value of all future revenues and the present value of

all future costs separately. Then, calculate the present value of all future profits, which equals

the present value of all future revenues minus the present value of all future costs.

a) The first year that the profit of the company becomes positive is year 3.

b) If the discount rate is 12%, the present value of all future profits of the company is $50 million.

c) If the discount rate is 10%, the present value of all future profits of the company is $111 million.

d) If the discount rate is 5%, the present value of all future profits of the company is infinite.

e) The present value of all future profits of the company is always positive no matter what the

discount rate is.

1.B Suppose the capital share in Canada is a = 2/5. Mark ALL the CORRECT statements. For

this question, use the growth accounting formula given in class.

a) If capital increases by 10%, labor hours increase by 5%, and total output increases by 10%

relative to last year, then TFP should decrease by 1%.

b) If capital increases by 15%, labor hours decrease by 5%, and TFP increases by 5% relative to

last year, then total output should increase by 5%.

c) If capital increases by 10%, TFP increases by 10%, and total output increases by 10% relative

to last year, then labor hours should increase by 10%.

d) If labor hours increase by 10%, TFP increases by 5%, and total output increases by 15% relative

to last year, then capital should increase by 1%.

e) None of the above.

1.C Suppose the Federal Reserve sells Treasury Bills and Treasury Bonds in the open market.

Compared to a scenario in which no such open market operations took place, which of the

following answers are CORRECT?

a) Banks short of reserves end up with more loans.

b) Banks short of reserves end up with the same amount of deposits.

c) Banks short of reserves end up with more equities.

d) The federal funds rate is lower.

e) The money supply is lower.