Q1. Suppose a health expenditure function is specified in the following manner: E = 500 + 0.2Y, (where E represents annual health care expenditures per capita and Y stands for income per capita.)
a) Using the slope of the health expenditure function, predict the change in per capita health care expenditures that would result from a $1,000 increase in per capita income.
Q2. Over the next 3 years inflation is expected to be: Year one 2.5%, year two 4.5%, year three 5.0%. What should investors require for an inflation premium on a Treasury bond with a three-year maturity?