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Now, suppose that a period of exceptionally good weather doubles the grape harvest in Europe. In the following graph, show the effect of this change in weather conditions on the world price of wine by shifting the World Price line. Then use the green triangle (triangle symbol) to shade consumer surplus when Canada is open to trade at this new world price. Finally, use the purple triangle (alamond symbol) to shade producer surplus in this case. Domestic Demand Domestic Supply + World Price New Consumer Surplus World Price Price of Wing New Producer Surplus Quantity of Wine Because of this change in the world price, consumers * , producers , and Canada as a whole Is T off.(2) Suppose that you have $1 to invest. You have two investment options: one is to buy 1-year U.S. bonds that offer a market interest rate of 8% per year, and the other is to buy 1-year Japanese bonds that pay 12% interest per year. Assume that you decide to buy the Japanese bonds with $1 and that you enter into a 1-year forward contract to protect your investment from possible fluctuations in the exchange rate. The forward contract involves the sale of the yen investment proceeds (principal + interest earnings) for dollars to be delivered one year later. Today's exchange rate is V100: $1, and today's forward exchange rate to be delivered one year from today is V104: $1. (You can solve this question step by step as follows.) 1 Calculate the proceeds (principal plus interest) from investing in the U.S. bonds for one year. 2) Calculate the proceeds from investing in the Japanese bonds for one year. 3 Convert the yen-denominated proceeds into dollars using the forward exchange rate one year later. Does the covered interest parity condition hold? Could you make more money from your investment in the Japanese bonds rather than your investment in the U.S. bonds? Q. 5 (2 points) (1) Explain the uncovered interest parity condition. (2) Suppose that you have $1 to invest. You have two investment options: one is to buy 1-year U.S. bonds that offer a market interest rate of 8% per year, and the other is to buy 1-year Japanese bonds that pay 12% interest per year. Assume that you decide to buy the Japanese bonds with $1. This time you don't enter into a forward contract to protect your investment from possible fluctuations in the exchange rate. Today's exchange rate is V100: $1, and the expected future exchange rate that will prevail one year from today is Y98: $1. (You can answer this question step by step as follows.) 1 Calculate the proceeds from investing in the U.S. bonds for one year. (2) Calculate the proceeds from investing in the Japanese bonds for one year. 3 Convert the yen-denominated proceeds into dollars using the future exchange rate one year later. 4Does the uncovered interest parity condition hold? Could you make more money from your investment in the Japanese bonds rather than your investment in the U.S. bonds?(2) Suppose that you have $1 to invest. You have two investment options: one is to buy 1-year U.S. bonds that offer a market interest rate of 8% per year, and the other is to buy 1-year Japanese bonds that pay 12% interest per year. Assume that you decide to buy the Japanese bonds with $1 and that you enter into a 1-year forward contract to protect your investment from possible fluctuations in the exchange rate. The forward contract involves the sale of the yen investment proceeds (principal + interest earnings) for dollars to be delivered one year later. Today's exchange rate is V100: $1, and today's forward exchange rate to be delivered one year from today is V104: $1. (You can solve this question step by step as follows.) 1 Calculate the proceeds (principal plus interest) from investing in the U.S. bonds for one year. 2) Calculate the proceeds from investing in the Japanese bonds for one year. 3 Convert the yen-denominated proceeds into dollars using the forward exchange rate one year later. Does the covered interest parity condition hold? Could you make more money from your investment in the Japanese bonds rather than your investment in the U.S. bonds? Q. 5 (2 points) (1) Explain the uncovered interest parity condition. (2) Suppose that you have $1 to invest. You have two investment options: one is to buy 1-year U.S. bonds that offer a market interest rate of 8% per year, and the other is to buy 1-year Japanese bonds that pay 12% interest per year. Assume that you decide to buy the Japanese bonds with $1. This time you don't enter into a forward contract to protect your investment from possible fluctuations in the exchange rate. Today's exchange rate is V100: $1, and the expected future exchange rate that will prevail one year from today is Y98: $1. (You can answer this question step by step as follows.) 1 Calculate the proceeds from investing in the U.S. bonds for one year. (2) Calculate the proceeds from investing in the Japanese bonds for one year. 3 Convert the yen-denominated proceeds into dollars using the future exchange rate one year later. 4Does the uncovered interest parity condition hold? Could you make more money from your investment in the Japanese bonds rather than your investment in the U.S. bonds?Question #3: ADI-AS Model In Points] When the stock market risesI there is an increase in household wealth and consumers feel more confident about the economy and as a result consumption increases. {a} Assume that the US. economy was initially at its potential output level { 17 }. Graphically illustrate using the ASAD modgl the effect of higher consumption levels on the US. economy. He sure to label the axes, curvesI use arrows to show shifts in curves. and market the equilibrium points: \"A\" for initial equilibrium; \"E\" for the shortvrun equilibrium; \"C\" for the longvnin equilibrium. [8 Points] {b} Using your graphs from Part {a} determine what would happen to the following variables in the short-run relative to their initial levels. For each of the variables state whether the variables INCREASE, DECREASE or REMAIN UNCl-IANGED. No explanation is required. [3 Points] {i} Output {iii} Unemployment {ii} Price Level {iv} Consumption {c} Using your graphs from Part {a} determine what would happen to the following variables in the long-run relative to their initial levels. For each of the variables state whether the variables INCREASE, DECREASE or REMAIN UNCHANGED. No explanation is required. [3 Points] {i} Output {iii} Unemployment {ii} Price Level {iv} Consumption (12 points} Consider the payoff matrix below. The players make their choices simultaneously and without communication between them. The game will be played only once. Each player is aware of the whole payoff matrix. B Firm B A Raise P Hold P Cut P Raise P 20 30 40 Firm A 2D SCI 20 Hold P 4E! 30 5E] 3D 40 40 Cut P '10 2E! 30 2D SCI 10 a. If Firm A decides to raise its price and Firm B decides to cut its price, what is Firm B's payoff? b. Does Firm A have a dominant strategy? If so, what is it? c. Does Firm B have a dominant strategy? If so, what is it? d. Which option raise, hold, cut should Firm A choose? e. Which option should firm B choose? f. Is there a Nash equilibrium in this game? If so, which outcome is it? (Describe the outcome by giving A's option and B's option.) (4 points} How many Nash equilibria could there be, at most, in a game with a 3 x 5 payoff matrix? (El points} Consider the payoff matrix below. Two firms are thinking about offering a new model of their product. There is not enough demand for both firms to have good sales if they both offer the new model. a. What is a value of X that will make this game a prisoner's dilemma prob em? b. As a prisoner's dilemma problem, which outcome is the dominant strategy equilibrium? c. As a prisoner's dilemma problem, which outcome would the firms choose if they could collude? (Assume that the two firms can talk to each other, but they cannot exchange funds for each other's cooperation.) Application Activities Q1. By using the fiscal policy tools explained in this chapter, explain the possible fiscal poli- cy actions of the government and their effect on output and employment during a recession. Q2. Explain possible fiscal policy actions of the government and their effect on output and employment during a period of inflation. Q3. Explain why a tax rebate increases output less than increasing government spending by the same amount. Give an example of both for comparison. Q4. Distinguish between fiscal policy and monetary policy actions undertaken by two dif- ferent government agencies. Do they complement one another, or do they conflict? Briefly explain why or why not. Q5. What is the open market operation of the Fed? How do the open market operations work, and what are the effects on the money supply and the economy? Q6. What is the federal funds rate, and why are changes in the federal funds rate considered more effective than other policy options for achieving monetary objectives? Q7. Suppose the state of the US economy in 2019 is very strong, with the lowest unemploy- ment rate in decades. Given this scenario, what courses of policy action would the Fed be expected to take in using the federal funds rate? Explain briefly. Q8. Why does the Fed rarely change the existing reserve requirements?Application Activities Q1. By using the fiscal policy tools explained in this chapter, explain the possible fiscal poli- cy actions of the government and their effect on output and employment during a recession. Q2. Explain possible fiscal policy actions of the government and their effect on output and employment during a period of inflation. Q3. Explain why a tax rebate increases output less than increasing government spending by the same amount. Give an example of both for comparison. Q4. Distinguish between fiscal policy and monetary policy actions undertaken by two dif- ferent government agencies. Do they complement one another, or do they conflict? Briefly explain why or why not. Q5. What is the open market operation of the Fed? How do the open market operations work, and what are the effects on the money supply and the economy? Q6. What is the federal funds rate, and why are changes in the federal funds rate considered more effective than other policy options for achieving monetary objectives? Q7. Suppose the state of the US economy in 2019 is very strong, with the lowest unemploy- ment rate in decades. Given this scenario, what courses of policy action would the Fed be expected to take in using the federal funds rate? Explain briefly. Q8. Why does the Fed rarely change the existing reserve requirements