User:P64/sandbox

User:p64/Sandbox

For the first time, Jason Sanford observed, he "found tons of articles I actually wanted to read.  ... Thank you to both SFWA and its members for pushing the Bulletin to be what we always knew the magazine could be. This is what we've all been wanting from SFWA—a member magazine which actually provides useful information to members."

Homework

Homework 1

H - I don't recall hearing anything in class about the purpose of the homework, how it will be marked, etc. You may want to say something now that every student has received the response "Good job!", etc.

H1 feedback

Concerning feedback to students ...

Some feedback to you from last Friday evening session T1, wherein we talked about two homework questions only.

H1.2

What if there is a question on the exam, with similar factual basis, and a student does not know a crucial fact such as meaning of "the Confederate government" in context of "the US Civil War"?

H1.8

(Here I interpret a student complaint about the Key, "I would object to any quantitative answer.")

The given answer seems to be essentially quantitative. At first glance, "$20 million" (where 18M is the correct number, I believe). Rereading the question, one might conclude "C/D=0", or even "C=0", is essentially the answer. Is that what you intend, for full credit? It seems more an essay question. (I would say, the question suggests an answer in words: "The public ..." or "Borrowers ..." or etc.)

Homework 2

I think the questions are clear enough, having studied them and also the draft answers. (Good, since some students must be working on this set.) And I think some of the answers need improvement before their distribution. (Tuesday night.)

Homework 3

Answer 3 should be improved in its wording. Otherwise I think the answers are ok.

The questions may be improved, I think, to guide the students toward what are the main points, as I know them from reading the answers. For instance, 1b. say "corporate profit tax rates" 3. say that the contract will be fulfilled; there is zero probability of default (I thought about this one in terms of default.) 8. say that the public is risk-averse (This has been an open question in H1 and TA session.)

6 and 7.

Question-and-answer 6 are ok considered alone. So are Q&A 7. It's odd that they are directly contradictory. H3.6 can only be answered supposing that US govt bonds are risk-free, and thus provide a baseline for measurement of a risk-premium elsewhere. Right? And H3.7 explains that a US Treasury bond is not risk-free.

10.

Questions H3.10 are presented in terms of the "current i" and one person's concern about i increase. But the answer is in terms of i=.05 and i=.06, both permanent according to market consensus. Two different infinitely long-term market rates, in effect. Right?

Homework 4

Homework 4 questions

Mark, For your consideration. If there any some revisions to make (or any other announcements concerning tomorrow and next week) perhaps there should be a one-page handout tonight rather than revise the file that has been posted. Paul

8. "REAL exchange rate"

I think this refers to our classroom exchange rate, ER, adjusted for purchasing power parity, perhaps in one of several variants defined by CPI, WPI, etc. Right?

If so, I wonder whether you hope they will find relevant material in the book, and also whether I should talk about it.

If not that, then we should delete "real".

4. "a percentage increase ... a percentage decrease"

I think the point is quantitative, or equal percentages, so it were better to say, "a 1% increase in a country's relative rate of inflation should lead to a 1% decrease in the value of its currency".

Homework 5

Question 7 and its answer

Midterm exam

Midterm exam.

I infer from the heading, and confirm at Canvas, that we have Undergrad and Grad students. You haven't told me of any implications, so I suppose there are none for me concerning the class meeting, homework, or TA sessions. What you sent me is the Graduate exam.

You also sent a two-page answer to Part 3. I will need to see all answers in order to anticipate any trouble, and recommend any rewording. Also, of course, in order to discuss what answers are worth how much credit.

No rush. Probably the exam is for my serious consideration on Wednesday. It will be good for me to see two more class meetings. H2 and H3 must have greater priority now.

questions

15. No comment except I hope most of them get most of this.

14. "a yield to maturity of 4%"; ... simply "a yield of 20%" ... "rise in the yield"

I think we specify "current yield" or "yield to maturity" thruout, to avoid a distraction that is beside the point --altho the same answer may be valid regardless which interpretation they give. [And in the Answers revise "rate of return" to some "yield".]

9. "corporate taxes on NEW investments"

This is good, to help them focus on a substitution effect for Business Investors --instead of "corporate taxes" (H3 question 1b) which may direct them to wealth effects on stockholders and budget effects on the government, etc.

6. "withdraw *funds that are in excess of* the amount of excess reserves"

=> "withdraw *funds greater than* the amount of excess reserves"

I think we should avoid "excess ... excess", so near in two different senses, where the first is unnecessary and is quirky English-language imo.

2. "high inflation" ... "high nominal interest rates" ... high real interest rates ... "VERY high inflation"

=> delete "very"

I think "VERY high" directs attention to hyperinflation; elsewhere the book or homework or I in TA session has used "high" and "very high" for the ordinary and hyper- cases.

marking

All, These remarks concern what I have written on your exam papers.

Item by item, red ink in the left margin

Parts II-III, "+" means 1/2 point. For instance, "1+" on the last page, Part 3b (4 points), means 1.5 out of 4.

Part I, items #1-10, "0" or one to four vertical tallies, "|" to "||||", means no credit or one-quarter to full credit. (These items have different point values for undergraduate and graduate students, but they were scored blind, in quarters, and converted to points later.)

Part by part, red ink

Parts II-III, subtotal score out of 10, circled. For instance, "4+" at the head of Part 3 (10 points) means 4.5 out of 10.

Part I, number of tallies (0 to 40) and subtotal in points, circled. For instance, 28, and circled either 14 (out of 20) or 7 (out of 10).

Top of page

in red, those subtotal scores from each Part, and raw total (out of 30).

in green, "plus points" that represent the scale shift, and scaled total, circled.

Marks/writings within the questions (underlining some key words), and within your answers. I hope you will understand most of this abbreviated comment, which is not limited to indications where you lost points, and does not completely indicate that. Some marks draw attention to where you might improve your answer, or briefly explain how you might improve it, regardless whether you earned a full score on the item.

Three matters in particular:

1. Item #5. "Abrogate"/"abrogate?" means that you evidently or probably interpreted the "elimination" of the (USA) social security system as its abrogation (default, repudiation, etc). That is, no more social security payments by the US Federal government to the current recipients, essentially retired USAmericans. You earned part credit in that context.

2. Item #3a. On most completed graphs, I used green ink to represent the shortage or surplus of loanable funds at the old interest rate, for the shift in Supply or Demand that you displayed. (Worth 1 point as 3a.ii regardless of which shift in Supply or Demand.) And I used orange ink to represent movements along the two Supply curves, usually, in response to the change in interest rate implied by that shortage or surplus. COMMONLY --for a displayed those are increase in domestic lending LD and increase in domestic-plus-foreign lending LD+LF as the domestic interest rate increases; where the diminishing gap between those S curves represents a decrease in the outflow of loanable funds, or decrease in borrowing by foreigners BF.

3. Item #3b. Commonly I wrote in the left margin, "This graph fits the other" or "This graph does not fit the other", indicating whether the graphical part of your answer is consistent with answer 3a, or not. Then you earned points for details on the graph or written explanation of consequences, all in context of whatever shift in foreign exchange Supply or Demand you displayed.

Paul Wendt P/\/ \/\/t

substance

Expected prices in some markets.

All, This entire note underscores an important phenomenon (IMPPHE) that was featured in Midterm item #10. If you understand it, stop reading after the first paragraph. Paul Wendt

IMPPHE: Well-developed markets for some things operate to *make expected price changes actual*, or to "realize" those expectations, and to *bring them forward in time* as current price changes. What things? Many or most financial instruments, for instance that is crucial in this course.

Midterm item #10 features this phenomenon in the Bond Market --given the preliminary point that in a bond market any "increase in expected interest rates" is a "decrease in expected prices".

The effect is symmetric, on both sides of the market. Because market agents generally expect that prices will decrease in the future:

On the supply side, sellers (here borrowers; business and non-profit investors) prefer to act now rather than wait. => Increase in current Supply; S curve shifts right/down.

On the demand side, buyers (here lenders; household and institutional savers, or "portfolio investors") wait rather than act now. => Decrease in current Demand; D curve shifts left/up.

Both effects generate surplus at the current price, so that the price must decrease in order to clear the market. Thus the Bond Market operates to bring the expected future price decrease (interest rate increase) forward in time as a current price decrease.

==

Hi, Lenko

I will keep the original with attached digital copy of your exam paper at least until Monday.

Paul Wendt P/\/ \/\/t

>> Part 1.

5. Why would the elimination of social security decrease interest rates? After all, the transfer payments are income. I see that the first direct impact is reduction in income and wealth. That in turn will shift the money supply left and increase interest rates. I understand that people may start saving more, but this will not be immediate and will affect future interest rates (the question is asking for impact on interest rates). Also, to claim that they will be saving more we need to make additional assumptions – we only consider people saving for retirement, they do not have other retirement accounts, etc. <<

Here your quarrel is with the Question and its Answer, or their wording.

Perhaps I could remark usefully on some of your economic points. Ask me later if you are interested.

>> 7. I had drawn the effect on the balance sheet to show beginning in ending balances. Why am I only given half points when the question asks to show the impact and no additional requirements? <<

Key word *mortgage* loans. Maximum 2 points for anyone who overlooked that $50 Loans would be replaced by something, probably real estate, on the asset side. (The example of mortgage loans, with real estate collateral, is the one presented on the chalkboard last Wednesday, if i recall correctly.)

Many students showed only a decrease in Loans on the asset side, and a replacement of $20 Net Worth by -30 on the liabilities side, or by "Capital Loss" or "Negative Net Worth" +30 on the asset side. You don't actually show the loans Before, and do show negative "Capital Loss" rather than positive "Loss". Probably a "|" (1/4) rather than a "||".

>> 9. This question is asking what happens to bond prices and yields if taxes are eliminated. To me, your solution implies the additional assumption that corporations will increase new investment spending (rather than decrease borrowing). We discussed in class that tax cuts do not necessarily imply growth, because the reinvestment of the additional funds is not guaranteed. <<

This is not a general tax cut, whereby corporations have more money and government has less. As a decrease in taxes on "new investments" it operates per unit of new investment. Perhaps it may be considered a decrease in the cost or expense of new investment, but it is better think of it as *increase in after-tax return on new investment* --because a smaller tax is deducted from before-tax return on new investment.

>> 10.I believe I have satisfied the question. The question is not asking why corporations will supply more bonds, nor what bond buyers would do. <<

The effect is symmetric on both sides of the current bond market. Bond sellers supply less, and bond buyers demand more, at any current price. S and D curves both shift.

---

Hi, Laura

I will keep the original with attached digital copy of your exam paper at least until Monday. I should not have said "noon" before realizing that I must re-read several questions and answers, and think.

Paul Wendt P/\/ \/\/t

>> Question 3. This questions asks for the impact to the assets and liabilities of both CitiBank and the Fed’s balance sheets. I answered that there would be no impact to the Fed’s balance sheet, however I did not expand that the allocation of the liabilities would change (balance sheet would continue to have the same amount of assets, liabilities, and NW, so in my mind, no change). The answer asks for impact to assets and liabilities, which would not change, and that is inline with my answer. It appears I did not receive any points for this answer as I did not expand on the allocation, however I believe the answer is still correct. <<

Throughout the course we feature "composition" of assets and liabilities in broad categories such as C, D, and R, Forex, Gold, and "Goods" as an essential aspect of the balance sheet. The composition we overlook routinely is such as RR and ER components of R, or Deposits at the Fed and Vault Cash components of R.

>> Question 5. I am confused by this question, as it notes the “elimination” of the social security system. As the test review notes stated, it says that I must have interpreted elimination to mean “abrogate,” but it is implied that that was not the context for that word in the question. I am confused then as to what the question was asking in regards to “elimination” social security?

Yes, I read that question to mean that the Social Security System in its entirety was eliminated, meaning that it would no longer be a government program, would result in less need for government spending, etc., which is the basis of my answer, however I received minimal credit for this. The answer provided in the answer key seems to indicate a long-term impact (people savings more, etc), however this would occur over the long term. My thought would be that my answer would be an immediate short term impact. Would this not be the case with a decrease in government spending? Any insight you could provide on this would be helpful. <<

Here your quarrel is largely with the Question and its Answer, or their wording.

"Abrogate?" means that I think probably ... .

Maximum "||" points (half) for answers exclusively in terms of the government budget. Such a 2-tally answer might overlook that government would no longer collect SS taxes, but focus on a decrease in government borrowing, hence impact via some UST bond/bill market, on interest rates as inverse of bond prices.

>> Question 6, answer b. The answer asked for options available to the Bank if customer decides to withdraw funds. I provided two options, but did not receive full credit as I didn’t supply more. The answer did not specify that all options were required or a minimum number of options to receive full credit. <<

I awarded full-score "||||" only to those who showed both some asset-side and some liability-side action by the bank, so two options might have been enough.

>> Question 14. The answer I provided to this question noted that the rise in the yield to maturity on these bonds was based upon increasing risk relative to other investments. The answer key noted that the increase in yield must be explained by an emergence of an unexpected default risk on these bonds. I did not expound on the answer, however the initial answer seems to be correct. I received 0 points for this. <<

You received 0+, or 0.5 out of 2 points. (See the handout in which I returned the exam papers.) Probably I awarded 1.5 or 2 points only to those who mentioned default in particular, or capital loss, or observed that the bond price must now be below its purchase price. (Price below face value is trivial.)

>> Question 15. Specifically part B. I am the first person to admit that graphing economic concepts is not my strength and is, frankly, a weakness of mine. I find it very difficult, but conceptually believe that I can convey ideas as to what I think is happening in a specific situation. I attempted the graphs based upon what I thought would be happening in the market and noted it as such. I knew that the graphs may not be completely accurate, but thought that by writing conceptually what was happening in this scenario, that I would be conveying that I understood the concepts of the discussion. As my graphs did not match, I received minimal scoring, although the comments noted that it was largely correct (conceptually). It appears that perhaps it would have earned me more points if I would have skipped trying to graph this question and instead written conceptually what was happening in this scenario. <<

This is item #3b. (There is #15 somewhere but not included in the digital copy that you attached. #3a is missing too.)

My note "this graph does not fit the other" means that your answer 3b does not fit your answer 3a. (See the handout in which I returned the exam papers.)

It's true that I assessed consistency of answers 3a and 3b in reference to the graphical part of #3b (which every student provided) in relation to both parts of 3a if necessary.

You didn't receive "minimal scoring" but 3/4 of the 2 points available for the largely correct too brief interpretation of your own S curve shift (whose rationale I did not see, in relation to your answer 3a).

>> I am asking that these questions and their relative scoring be re-evaluated as part of my test score. My understanding from the class discussion and provided mid-term sample (which provided a significant amount of one-word answers or very short answers) was that we would be asked to answer the questions and display an understanding of the concepts, however based upon the answer key and relative scoring, that did not seem to be the case. It appears that there were numerous punitive deductions if the answer was not detailed (even if correct) or provided multiple scenarios, when that was not what the test question stated. <<

Paul Wendt P/\/ \/\/t