Consider a closed economy. The goods market is represented by the following equations:

C = 160 + 0.6YD
I = 100 + 0.2Y – 500i

T = 100
G = 100
YD = Y - T

1. Derive the IS equation from the equilibrium position Y = Z ≡ C + I + G and draw the IS curve on the graph.

In the money market, the real money demand is (M d/P) = Y – 1,500i; and the real money supply is (Ms/P) = 600.

2. Derive the LM relation and draw the LM curve on the graph where you draw the IS curve.

3. Solve for the equilibrium output Y and equilibrium interest rate i when both goods market and money market are at the equilibrium. Identify this equilibrium point on the graph in part (1).

4. Suppose now the government spending (G) increases from 100 to 200.
On the IS-LM graph in part (1) illustrate the effect of this increase in government spending on the IS or LM curve and mark the new equilibrium output Y and interest rate i.

5. Following this increase in government spending, how much will be the new equilibrium output Y and interest rate i?

6. How much is the multiplier of government spending?

7. Following the government spending increase, does the equilibrium investment I decrease or increase?

8. Suppose at the same time that the government spending increases, FED would use the monetary policy tool to accommodate such an expansionary fiscal policy to keep the equilibrium interest rate unchanged. Under this circumstance, how much would be the new equilibrium output (Y)? How much is the ‘multiplier’ of the government spending in this case?

9. In practice, how does FED achieve such an accommodation policy as mentioned in part (9). Illustrate the effect of this policy on an IS-LM graph. As a result, how much does the real money supply (Ms/P) need to increase to remain the equilibrium interest rate unchanged when the government spending increases?

Show income determination in a closed economy in contrast to an open economy using the concepts of income as determined by injections (like investment and exports) and leakages (like saving and imports). Discuss in words like Singapore, with a high reliance on international trade and capital flows, is an open economy.

Suppose in a closed economy, the demand for loanable funds can be expressed as

r =13 – 0.05Q and the supply of loanable funds can be expressed as r = 0.015Q, where r is the real interest rate expressed in percentage and Q is the quantity of loanable funds.  Also assume the government initially has a balanced budget.

(a)        What is the equilibrium real interest rate and quantity in the loanable funds market?    Show your work. (10 points)

(b)        Suppose a government’s budget surplus will change the supply for loanable funds to

r = -1.95 + 0.015Q, what is the equilibrium real interest rate and the quantity of loanable funds now?  (10 points)

(c)        How much is the amount of private savings?  Show your work. (10 points)

(d)        What is the amount of the budget surplus? (10 points)

Suppose there are two closed economies: Economy A and Economy B. Economy A has a high average rate of time preference relative to economy B’s low average rate of time preference.

(1) Describe the differences you would expect to see with respect to interest rates and levels of investment in the two economies. (2) Describe what would occur if these countries were open to international capital flows. (This is the key to answering Bernanke’s question)

consider a closed economy. suppose the market for corn in banana republic is competitive. the domestic market demand function for corn is Qd=18-P and the domestic market supply function is Qs=P-2, both measured in billions of bushels per year. in order to help the corn industry, the government initiated a price support program by purchasing 2 billion bushels corn in the market a)Draw a graph to show the market equilibrium price and quantity. Identify the area of dead weight loss on the graph. b) Calculate the new market equilibrium price and quantity Now consider a small open economy. The domestic supply and demand functions are the same as before. Also assume the import supply curve is infinitely elastic at a price of 4$ per bushel. c) suppose the government imposes a tarif of 3$ per bushel. calculate the total willingness to pay of the domestic consumer, domestic producer surplus and deadweight loss d) Now suppose instead of using tarif alone, the government uses a policy combination by imposing a tariff of 2$ per bushel and an import quota of 6 billion bushels at the same time. e) calculate the domestic consumer surplus, domestic producer surplus and dead weight loss

AMZN closed at $1,162.35 on 2017.12.01. A 2018.03.16 call option with a strike price of $1,000 sells for $182.30.

a) What is the intrinsic value of this option?

b) What is the time value of this option?

c) Your fancy computer estimates the volatility of AMZN as σ = 20.00 % and the risk free rate is r = 3.00 %. Given this information, what is the Black-Scholes value of this option?

d) Given the Black-Scholes value obtained in the previous problem, would you enter a long (buy) or short (sell/write) position in this option?

The following four (4) problems are based on the following information:

AMZN closed at $1,162.35 on 2017.12.01. A 2018.03.16 call option with a strike price of $1,000 sells for $182.30.

1. What is the intrinsic value of this option?

2. What is the time value of this option?

3. Your fancy computer estimates the volatility of AMZN as σ = 20.00 % and the risk free rate is r = 3.00 %. Given this information, what is the Black-Scholes value of this option? Feel free to use Excel or R to answer this problem.

4. Given the Black-Scholes value obtained in the previous problem, would you enter a long (buy) or short (sell/write) position in this option?

Find the closed formula solution to each of the following recurrence relations with the given initial conditions. Use an iterative approach and show your work! What is a_100? a) a_n=a_(n-1)+2,a_0=3 b) a_n=a_(n-1)+2n+3,a_0=4 c) a_n=2a_(n-1)-1,a_0=1 d) a_n=-a_(n-1),a_0=5

Suppose there are two closed economies: Economy A and Economy B. Economy A has a high average rate of time preference relative to economy B’s low average rate of time preference. (1) Describe the differences you would expect to see with respect to interest rates and levels of investment in the two economies. (2) Describe what would occur if these countries were open to international capital flows. (This is the key to answering Bernanke’s question)