Define each:

1. Quantitative easing

2. Forward guidance

3. Okun’s Law

4. NAIRU

1. Exchange rate crises

1. Explain how the central bank actually fixes the exchange rate.  What does this imply about the proximatecause of an exchange rate crisis with a fixed exchange rate? (2 pts)

2. Why do exchange rates crises tend to be more costly in emerging markets (i.e. poor/middle income countries) than in rich countries? (2 pts)

1. This question is on fixed vs. floating exchange rates.

1. Describe the major benefits and costs of fixing exchange rates. (2pts)

2. Explain how monetary policy coordination works in a fixed exchange rate system.  What is/are the major obstacle(s) to such coordination? (2 pts)

a. Find information on the trade balance for the US and find the comparable measures for the country you have chosen (UK) for the past three years. Discuss the trend of the balance of trade for each country.

b. For the currency in each country (the dollar in the US and whatever the currency is called in the country you chose), find the exchange rates for the previous three years. For the US, find the exchange rate with the Euro, the Japanese Yen, and the British Pound. For your selected country, find the exchange rate with the US dollar, the Euro, and the Japanese Yen. Describe the trend of exchange rates for each currency over the three-year period — is the currency appreciating or depreciating against the other currencies? Explain how this pattern of the currency can impact the economy.

The discussion forum this week involves Business Method Patents. First, in your view, what should the standard be for a business method patent? Second, please include a discussion of whether you think that Amazon should be able to patent the One-Click method of ordering goods AND whether you think Facebook should be able to patent a process that “dynamically provides a news feed about a user of a social network.”

Briefly explain the two sources of consumer welfare increase in the Krugmanís model of monopolistic competition when markets integrate

The private marginal benefit associated with a product’s consumption is PMB = 350 − 4Q and the private marginal cost associated with its production is PMC = 6Q. Furthermore, the marginal external damage associated with this good’s production is MD = 4Q.

a. What is the market price and quantity? (6 points) b. What is the social optimum price and quantity?

b. To correct the externality, the government decides to impose a tax of T per unit sold. What tax T should it set to achieve the social optimum?

Two firms compete under Cournot competition with constant marginal costs c1 = 2 and c2 = 4. The market demand is P=18-Q .

a) Compute the market share of each firm, the market price, and the total quantity produced in the market.

b) [CHALLENGING] You later hear that the marginal cost of firm 2 increased, and realize that the market price is now P = 9. What is the new marginal cost c2 ?

please also show how to find the |df/dt|, L, M AMD LOCAL TRUNCATION ERRROR, GLOBAL ERROR

Business Cycle

We have learned that a competitive market always experience business cycles in the short run. The output fluctuate around the upward trend, creating four period: recovery(from trough to trend), expansion(from trend to peak), contraction(from peak to trend) and recession(from trend to trough) .

The cycle is usually self enforcing, when we are in the expansion, asset price goes higher and higher, so as the value of the collateral, people become optimistic and inclined to engage in the more risky activity. The high leveraged speculation was fueled by the 'shadow banking system' which generally refers to those unregulated institution or entity conducting financial activity without oversight. The shadow banks usually could attract swarm of investors since they provide higher return than traditional banking system. As a famous saying goes 'When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance.'

The MBS(mortgaged backed security) is considered as shadow banks before the 2008's financial crises. Banks could accelerate their debt-loan cycle by securitize their mortgage and sell to investors. In the process banks transfer their liability to the investor, this create the moral hazard since bank takes no risk to provide MBS. At the beginning the extra liquidity it provides benefit both creditor and debtor. Credible borrowers get loans from MBS investors otherwise bank may lack the liquidity to provide. Things go wrong when banks securitizing the loans from those borrowers who is likely to default, the so called sub mortgage.

In order to sell them off, they bundled the low profile submortgage together with high profile mortgage, create the so called CMO(Collateralized Mortgage Obligations) to get a good score from the rating agency like S&P and Moody's. On the one hand, rising housing prices made mortgages look like fail-proof investments, enticing investors to buy CMOs.

On the other, insurance companies like AIG selling CDS(credit default swaps) to investors, which act like insurance contracts on on those CMOs and MBSs. Investors thus could hedge the default risk of CMOs and MBSs by buying CDS.

The business cycle reach the tipping point as the collapse of the shadow bank system, liquidity shrink, more and more sub-mortgage default leading to the collapse of AIG. The defaulted CMOs and MBSs holding by the investment banks can not compensated by the CDS anymore. Leading to the collapse of Merrill Lynch and Lehman Brothers and the subsequent Financial Crises.

(a) Draw a graph of output to indicate the business cyclical behavior.
(b) Draw the trend along with the output
(c) Label the four period on your graph.
(d) What factors other than credit boom could cause the business cycle?