Answer the following questions.

5.If the central bank has to intervene in the foreign exchange markets to prevent the domestic

currency from depreciating, then its foreign exchange reserves will:

A decrease and the domestic money supply will rise.

B decrease and the domestic money supply will fall.

C increase and the domestic money supply will rise.

D increase and the domestic money supply will fall.

(i) Explain how a free-floating exchange rate will automatically correct a balance of

payments current account deficit with reference to the substitution effect.

(ii) Outline how the effectiveness of the substitution effect may be reduced by an income

effect.

21.7 Explain the main disadvantages of a fixed exchange rate system.

Explain the main disadvantages of a free-floating exchange rate system.

For an actuarial present value denoted by Jim, describe the benefit. Show that -| = Ax Axum 'i" D\". For independent lifetimes x) and y}, show that Gemini\"3', Um\") = (A; flak/l, - Ely) Express, in terms of single- and joint-life armuity values, the actuarial present value of an annuity payable continuously at a rate of 1 per year while at least one of (25) and (30} survives and is below age 50. Express, in terms of single and joint-life annuity values, the actuarial present value of a deferred annuity of 1 payable at the end of any year as long as either (25} or (30} is living after age 50. Express, in terms of single- and joint-life annuity values, the actuarial present value of an ri-year temporary annuity-due, payable in respect to (Jry}, provid- ing annual payments of 1 while both lives survive, reducing to 1/ 2 on the death of (x) and to 1/ 3 on the death of {y}. An annuityaimmediate of 1 is payable to (x) as long as he lives jointly with (y) and for it years after the death of (y), except that in no event will payments be made after at years from the present time, at Z:- 11. Show that the actuarial present value is Iieri" + aEx ax+myzb Obtam an expression for the actuarial present value of a continuous annuity of 1 per annum payable while at least one of two lives (40) and [55] is living and is over age 60, but not if {40) is alive and under age 55. A joint-and-survivor annuity to (x) and (y) is payable at an initial rate per year wlu'le (it) lives, and, if (y) survives (x), is continued at the fraction p, 1,\" 2 i: p E 1, of the initial rate per year during the lifetime of (y) following the death of (x). a. Express the actuarial present value of such an annuitydue with an initial rate of 1 per year, payable in m-thly installments, in terms of the actuarial present values of single-lite and joint-life armuities. b. A joint-and-survivor annuity to (x) and {y} and a life annuity to (x) are said to be actuarially equivalent on the basis of stated assumptions if they have equal actuarial present values on such basis. Derive an expression for the ratio of the initial payment of the joint-and-survivor annuity to the payment rate of the actuarially equivalent life annuity to (x). . Show that a. 151,35, = fix; - Baylx [This exercise depends on material in Section 9.9.] a .., _ _ b. \"'ny = pix) \"ya - Air 31