Question #12

Reading: Reading 39 Economics and Investment Markets

PDF File: Reading 39 Economics and Investment Markets.pdf

Page: 5

Status: Correct

Correct Answer: A

Part of Context Group: Q12-16 First in Group
Shared Context
- Statement 1 made by Professor Adams is most likely to be: A) correct. B) incorrect in respect of the marginal utility of consumption. C) incorrect in respect of the inter-temporal rate of substitution.
Question
If Statement 2 made by Professor Adams is correct, the one year real risk-free rate of return will most likely be closest to:
Answer Choices:
A. 4.95%
B. 5.00%
C. 5.26%
Explanation
If the utility of delayed consumption is 5% less that consumption at present, setting the utility of present consumption as 1 implies the utility of delayed consumption is 0.95. = 0.95 The risk-free rate of return can then be calculated: =5.26%
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