Question P7-1. A very small country’s gross domestic product is $12 million.

P7-1. A very small country’s gross domestic product is $12 million.
a. If government expenditures amount to $7.5 million and
gross private domestic investment is $5.5 million, what
would be the amount of net exports of goods and services?

P7-2. How would your answer change in Problem 1 if the gross domestic
product had been $14 million?

P8-1. Assume investors expect a 2.0 percent real rate of return over the
next year. If inflation is expected to be 0.5 percent, what is the
expected nominal interest rate for a one-year U.S. Treasury security?

P8-4. A thirty-year U.S. Treasury bond has a 4.0 percent interest rate. In
contrast, a ten-year Treasury bond has an interest rate of 3.7 percent.
If inflation is expected to average 1.5 percentage points over both the
next ten years and thirty years, determine the maturity risk premium
for the thirty-year bond over the ten-year bond.

P8-6. You are considering an investment in a one-year government debt
security with a yield of 5 percent or a highly liquid corporate debt
security with a yield of 6.5 percent. The expected inflation rate for
the next year is expected to be 2.5 percent.
a. What would be your real rate earned on either of the two
investments?
b. What would be the default risk premium on the corporate
debt security?

P8-12. A Treasury note with a maturity of four years carries a nominal
rate of interest of 10 percent. In contrast, an eight-year Treasury
bond has a yield of 8 percent.

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