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2. Suppose Players 1 and 2 are participating in a rst-price sealed bid auction with private, independent valuations. Each player's valuation of the object to be sold, which is assumed to be worth 0 to the seller, is drawn from a uniform distribution on [0,1]. Each player knows her own valuation but only the probability distribution on the other player's valuation. Bids are restricted to be in [0,1]. Remember bids are chosen simultaneously, the highest bidder wins and pays the amount of his bid. If two bidders bid the same amount, one of them gets the object with probability 6.5. {a} What is a strategy for a player in this game? (b) Bidder 2 decides to choose his bid .52 = .8112, where 112 is his value. Consider bidder 1 and suppose her value is 6.6. Which is the best bid for her, knowing Bidder 2's bidding function, among these three bids {i} 111 = .64, (it) h] = .4, {iii} bl = .3. Assume she wants to maximize her expected payoE from the auction where she gets .6 in if she wins and i) if she loses, so her expected payoff is given by (.6 - samba 2 :22). {c} What would Player 1 bid with three bidders, with Bidders 2 and 3 bidding .8115 and .S'U3 respectively? Check for v1 = .6 and the three bids listed in (b) above. Consider a closed economy with xed prices and wages. Domestic demand for goods is given by: A5 = C (Y I T)+l(i_1re) +9. while demand for real money balances is equal to D MT = L (1:, i), where M D is nominal money demand, P is the price level, 1' is real income, and i is the nominal interest rate, It\" is the inationary expectations. Assume the price level is xed at P = 1. Suppose that the central bank xes the money supply M S = M. The liquidity trap. Assume now that the nominal interest rate is so low that the opportunity cost of holding money is negligible. Suppose that as a result people are indifferent concerning the division of their wealth between money and bonds, and that they are therefore willing to change their money holding without any change in the interest rate. Suppose that T and G are exogenous. i. What is the slope of the LM curve? ii. What is the slope of the AD curve? iii. is aggregate demand irrelevant to determine output if prices and wages are fully exible (so, AS curve is vertical)? III (10 points) Consider the following information about a country's international transactions during a year: Merchandise Exports $330 billion Merchandise Imports $198 billion Service Exports $196 billion Service Imports $204 billion Net Factor Income flows $3 billion Net Unilateral Transfers -$8 billion Increase in the country's holding of foreign $202 billion assets, net (excluding official reserve assets) Increase in foreign holdings of the country's $102 billion assets, net (excluding official reserve assets) Statistical discrepancy, net $4 billion A. Compute: Merchandise trade balance = Goods and services trade balance = Current account balance = B. Compute the private (non-OSB) financial account balance =_ Is this county increasing or decreasing its net international investment position (also called external wealth)? Explain briefly how the CA has to be financed by the FA and why this process increases or decreases external wealth C. Compute CA + private FA + SD = This must imply that OSB = Is this country increasing or decreasing its foreign reserve holdings