Explain the tools of the Federal Reserve Bank for the exercise of Monetary Policy.

Reference: 11th edition Financial Markets and Institutions by Jeff Madura, Chapters 4 and 5

Explain why these misconceptions are not true:

• Most economies function on their Production possibilities curve.

• Savings lowers economic activity.

• Government budget debt and deficit mean the same thing.

• Decisions made in Washington D.C. have little impact on the economy.

• Government spending stimulates demand but will not affect inflation.

• The government can never shut down.

A chemical factory and fishery are located on the same lake. Suppose the chemical factory has the property right to use the lake, and that its pollution is reducing the number of fish in the lake which directly harms the fishery. The marginal damage function is given by MD = 5E and the marginal abatement function is given by MAC = 1000-5E. Emissions are in units per month and costs are in dollars per unit of emission. How much would the fishery need to offer the factory per month to reduce emissions to the socially efficient level? How much better off would this make the fishery compared to a situation where the factory does not reduce any emissions? How much better off would the factory be if it accepts the fishery’s offer and reduces its emissions to the socially efficient level?

1) Fill in the blanks: Fishery will offer to pay $_______ making the fishery better off by $_______.. The factory will be better off by$______.

Roemer’s approach to equality of opportunity is based on characteristics, while the mobility approach is based on how incomes or social status differ across generations. Do you think that these approaches are at odds with each other, or are they complementary? Explain your position. Your explanation should include some details of what the approaches measure and how they do so.

Give example of a factor-price distortion in LDCs? Explain how it impacts their economic growth.

Louis C.K. and other comedians try to subvert the Ticketmaster monopoly, there will be changes to the market for standup tickets. You will draw and explain this market conversion. In your first graph, begin with a market that is in monopoly as dominated by Ticketmaster. Depict the price and quantity (e.g. you’ll need a MR curve, a demand curve, MC/supply curve, and any consumer and producer surplus and deadweight loss). Then, in the next graph, depict the market as it becomes perfectly competitive. Depict how price and quantity change (e.g. this graph should display the monopoly price and quantity, then you should show the competitive price and quantity for comparison, as well as the new areas of consumer and producer surplus and deadweight loss). Make sure you’re clear on the graph and in your answer about what happens to price and quantity as the monopoly market is converted to perfect competition by Louis C.K.’s action (e.g. what increases, what decreases?). Also, make sure you make a clear statement about changes in efficiency (e.g. how consumer surplus, producer surplus, total surplus, and deadweight loss change)

Use the following information about an economy that produces only two types of products, organic food products and beverages. Calculate the following for the years 2015, 2016 and 2017, unless otherwise requested:

1. the nominal GDP
2. the real GDP using 2015 as the base year
3. the GDP deflator
4. the annual percentage change in nominal GDP for 2016 and 2017
5. the annual percentage change in real GDP for 2016 and 2017
6. the inflation using the GDP deflator for 2016 and 2017 (percentage

change in GDP deflator)

change in GDP deflator)

Can a player play a weakly dominated action at a Nash equilibrium? If yes, give an example. If no, explain why.

Q1.Two firms produce in a market with demand P=100-Q. The marginal cost for firm 1 is constant and equals 10. The marginal cost of firm 2 is also constant and it equals 25. Firm 1 sets output first. After observing firm 1's output, firm 2 sets its output. (Please pay attention. Read the brackets correctly.)

1a. For firm 2, the best response is R₂(q₁)=(A-q₁)/2. The value for A is?

1b. Solve for the Stackelberg equilibrium. The quantity sold by firm 1 is?

1c. Solve for the Stackelberg equilibrium. The quantity sold by firm 2 is?

1d. Consider the Stackelberg equilibrium you derived in 1b and 1c, (q_1S, q_2S). Consider the two firms' isoprofit curves passing through (q_1S, q_2S). The slope of firm 1's isoprofit curve, (dq₂/dq₁)|π₁ , at (q_1S, q_2S) is equal to?

[By definition, an isoprofit curve for firm 1 collects all pairs of (q₁,q₂) which give firm 1 the same profit level. c.f.: indifference curves for consumers. For example, π₁(10,10)=π₁(20,35)=700. The pairs (10,10) and (20,35) are on the same isoprofit curve. ]

1e. The slope of firm 1's isoprofit curve at the Cournot equilibrium (35,20) is equal to?

1f. Suppose now that entry requires fixed cost F=100. Find the limit output that firm 1 has to produce to deter entry. q_1L=?

1g. Given F=100, the profit maximising output for firm 1 is q_1*=?

2. Which of the following is not a characteristic of a long-run equilibrium for a firm in a monopolistically competitive industry?

Select one:

a. The firm maximises profits.

b. Price will be greater than marginal cost.

c. Average total cost will be minimised.

d. Price will equal to average total cost.

Use the quality maximization model to describe the role not-for-profit hospitals play in the diffusion of new medical technologies. Illustrate your answer on a graph.

. What was the "dominant" ethical theory that drove their decision to act as they did? How did you recognize that ethical theory was being used? Use examples from the case to justify

Consider the IS-LM and aggregate demand/aggregate supply model of Chapters 11 and 12. Consider a reduction in the level of taxes, starting from an initial situation in which output is equal to its natural level.

a) Depict the short-run effects of the reduction in T using 3 graphs: one for the market for goods and services, one for the IS-LM curves, and one for the Aggregate Demand and Supply curves. How do the new short-run equilibrium values of r, Y and P compare to the initial ones? (i.e., are they higher, lower or equal?)

b) Depict the transition from the short-run to the long run. To do this, draw 3 new graphs (with the same variables as before), in which the initial situation is the short-run equilibrium after the decrease in T. How do the long-run equilibrium values of r, Y and P after the shock in T compare to ones before that shock?

Note: be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift (including the initial adverse shock); and v. the terminal equilibrium values.

1. Suppose, a perfectly competitive firm is trying to determine its profit-maximizing level of output. The product sells for $260 per unit. The total cost function is given by C = 1000 + 80Q – 6Q2 + .2Q3. Find the equilibrium price and maximum profits. Also, find the shutdown point for this firm.

2. You are the manager of a monopolistically competitive firm, and your demand and Cost functions are given by Q = 20 – 2P and C = 104 – 14Q + Q2. a) Find the inverse demand function for your firm’s product. b) Determine the profit-maximizing level of output and price. c) Calculate the firm’s maximum profits. d) What long-run adjustments should you expect?

Chinese economy has grown at an average annual rate of close to 10 % in the past 40 years. Going forward, what are the challenges to maintaining high growth rates and what have been the government policy responses to those challenges – if any. Where do you see China going in the coming decades?