6. Policy coordination and the world economy Consider an open economy in which the real exchange rate is fixed and equal to one. Consumption, investment, gov- ernment spending, and taxes are given by C = 10 + 0.8 (Y - T), I = 10, G =10, and 7 =10 Imports and exports are given by IM = 0.BY and X =03 Y where Y denotes foreign output. a. Solve for equilibrium output in the domestic economy, given Y". What is the multiplier in this economy? If we were to close the economy-so exports and imports were iden- tically equal to zero-what would the multiplier be? Why would the multiplier be different in a closed economy? b. Assume that the foreign economy is characterized by the same equations as the domestic economy (with as- terisks reversed). Use the two sets of equations to solve for the equilibrium output of each country. [Hint: Usethe equations for the foreign economy to solve for Y' as a function of Y and substitute this solution for Y* in part (a).] What is the multiplier for each country now? Why is it different from the open economy multiplier in part (a)? c. Assume that the domestic government, G, has a target level of output of 125. Assuming that the foreign government does not change G", what is the increase in G necessary to achieve the target output in the domestic economy? Solve for net exports and the budget deficit in each country. d. Suppose each government has a target level of output of 125 and that each government increases government spending by the same amount. What is the common in- crease in G and G necessary to achieve the target output in both countries? Solve for net exports and the budget deficit in each country. e. Why is fiscal coordination, such as the common increase in G and G* in part (d), difficult to achieve in practice?On April 24, 232D, obtained the following information on bonds of ]hh Limited: Par value = 51,000, coupon rate 535%, maturity date = January 1, 2025, interest payment dates = January lr July 1. A Determine the number of days in accrued for this bond. B Determine the acaned interest on the bond [use 3035:] convention} C Given that the market yield on the bond on April 24, 2512!] was 4.50%, determine full {dirty} price and clean price forAElC bond on this date. D What price will the bond trade at in the market? Explain E Suppose on April 24. EDZD, you purchased this bond in the market and held this bond for exactly one year {till April 24. 2011.]. The yield on this bond on April 24, 2011. was 115% and you decided to sell the bond. Assume you face 32% marginal tax rate and that 50% of capital gains are taxable. Assume also that coupon interest payments can be reinvested at the annual yield of 3%. 1Determine your gross income and gross return from your investment. 2 Determine your net income and net return from your investment 3 Decompose your net income into its components and comment on your results as a portfolio manager. Grad - A dummy variable equal to 1 if the CEO attended a post-graduate program (e.g. MBA), 0 if not Computer - A dummy variable equal to 1 if the firm is in the computer industry, 0 if not Financial - A dummy variable equal to 1 if the firm is in the financial industry, 0 if not Here are the results of a regression of Logsalbon on the covariates: Log Salbon = 3.65+ .31 LogSales+ .0016 Fiveret+ .014 Age-.037Grad-.0037Computer+ .156 Financial ,R = .32 (.25) (.019) (.0012) (.003) (.039) (.064) (.049) Here are some tests of a few joint hypotheses: Ho : B2 = B4 = 0, F-statistic = 1.423 Ho : B2 = 35 = 0, F-statistic = 1.026 Ho : B4 = 35 = 0, F-statistic = 0.473 Ho : B2 = B4 = 35 = 0, F-statistic = 0.959 a. People frequently complain about the high salaries and bonuses earned by CEOs. Some suggest that their compensation is almost totally disconnected from the performance of their firms. Using the company's five year return (Fiveret) as a measure of a firm's performance, do you find evidence that CEO's are rewarded for good performance? What effect do you find? Justify your answer. b. Do CEO's at larger firms earn higher salaries? If so, how much? Justify your answer using Log Sales as your measure of firm size. c. Do the data provide any evidence that CEO's receive a premium (i.e. higher earnings) for having attended a post-graduate program? What effect do you find? Explain. d. Suppose I re-run the regression using Salbon instead of Log Salbon as the dependent variable and find that R" = .34. On the basis of this evidence, should I conclude that it's better to run this new regression instead of the earlier one? Explain