Assignment

Assignment – Fundamental of Economics – ECON 102

Last date for submission 26th April 2016

Total Marks = 20 marks

Ques. 1 Read the following comprehension and answer the given questions. (2 x 2= 4 marks)

People often ask economists for predictions about the future of the macroeconomy. Forecasts about

the economy’s future, even from experts, are not unlike a baseball writer’s prediction of who will

play in the next World Series. The prediction can seem well-reasoned and logical, but it is hardly

foolproof. Certain statistical series tend to move in similar ways through all business cycles.

Knowledge of these series and their tendencies can provide some insight into future business cycle

movements. The Conference Board, a not-for-profit organization, publishes monthly updates of

what is called the “index of leading economic indicators.” The index is a weighted average of 10

statistical series that usually lead, or begin turning upward and downward, before the overall

economy does. Because not all the components of the index turn before the business cycle hits a

peak or a trough, movements in the index are more reliable than the movement in any one of its

components.

Among the most reliable of the leading indicators is an index of prices for 500 common stocks.

Investors want to buy stock shares when their prices are relatively low and sell shares when prices

are relatively high. During a recession, stock prices fall due to sluggish sales and profits. Interest

rates are relatively low during the last months of recessions because of reduced demand for

investment. In choosing between buying bonds and stocks, investors will favor stocks when: (a)

stock prices have fallen to a point where there is a strong possibility of future capital gains, and

(b) the opportunity cost of buying stocks—the interest rate on bonds—is low. Therefore, prices of

common stocks will usually begin to rise during the late stages of a business cycle, before a

business...