2022
ECS3701: MONETARY
ECONOMICS
OCT/NOV 2021
EXAM SOLUTIONS
, FOR FURTHER ASISTANCE CONTACT
THE BOOK FOUNDATION
+27 63 980 742
QUESTION 1
1.1 Would you be more willing or less willing to buy a share of Microsoft stock in each
of the following situations? Explain your answer. [10]
i. Your wealth falls.
Less willing, less wealth will be increasing the amount of money needed for
transitionary purpose against investing, and I will not have adequate resources.
ii. You expect the stock to appreciate in value.
I will be more willing to buy so that when the stock value appreciates, so will be my
wealth stored in the stock.
iii. The bond market becomes more liquid.
I will be less willing to buy stocks because bonds become more attractive since it
will be easier to buy or dispose the bonds, without high transaction costs.
iv. You expect gold to appreciate in value.
I will rather buy gold, and less willing to buy Microsoft stocks
v. Prices in the bond market become more volatile
I will only be willing to buy if the volatility is favourable and predictable. This is
because if prices in the bond market become more volatile, the risk associated
with bonds increases, and bonds become a less attractive asset, hence stocks in
Microsoft become attractive.
1.2 How will a fall in stock prices affect business investment?
It will reduce the demand of shares for the company and investors will be less attracted to
the stocks hence investment in the business will fall.
ECS3701: MONETARY
ECONOMICS
OCT/NOV 2021
EXAM SOLUTIONS
, FOR FURTHER ASISTANCE CONTACT
THE BOOK FOUNDATION
+27 63 980 742
QUESTION 1
1.1 Would you be more willing or less willing to buy a share of Microsoft stock in each
of the following situations? Explain your answer. [10]
i. Your wealth falls.
Less willing, less wealth will be increasing the amount of money needed for
transitionary purpose against investing, and I will not have adequate resources.
ii. You expect the stock to appreciate in value.
I will be more willing to buy so that when the stock value appreciates, so will be my
wealth stored in the stock.
iii. The bond market becomes more liquid.
I will be less willing to buy stocks because bonds become more attractive since it
will be easier to buy or dispose the bonds, without high transaction costs.
iv. You expect gold to appreciate in value.
I will rather buy gold, and less willing to buy Microsoft stocks
v. Prices in the bond market become more volatile
I will only be willing to buy if the volatility is favourable and predictable. This is
because if prices in the bond market become more volatile, the risk associated
with bonds increases, and bonds become a less attractive asset, hence stocks in
Microsoft become attractive.
1.2 How will a fall in stock prices affect business investment?
It will reduce the demand of shares for the company and investors will be less attracted to
the stocks hence investment in the business will fall.
