micronomics,,,

Explain whether each of the following statements is true, false, or could go either way depending on the circumstances. You can use graphs where appropriate to support your answers. Explanation determines grade. Start your answer by selecting one of the three statements - "True", "False", or "Uncertain" and then justify your selection. a. Over the past 20 years GDP in the US has increased by about 3.03% per year (at PPP). Over the same period of time, GDP in the countries from the euro area increased by 2.34% (at PPP). This implies that living standards in the US have increased faster than in these European countries (5 points).

b. If the interest rate controlled by the central bank declines to 0%, then the central bank cannot increase money supply further because they cannot lower interest rates below 0%. (5 points)

c. In order to reduce inflation, a central bank inevitably has to generate a recession. (5 points)

2. Exchange Rates. (Total: 10 points). Below is a graph of the exchange rate between the Malaysian Ringgit and the US dollar. The dashed line presents the actual exchange rate, while the solid line is a calculation of the equilibrium rate based on purchasing power parity. The exchange rate is reported in terms of how many ringgits one can buy with one US dollar. From September 1998 until July 2005 the ringgit was fixed against the dollar at 3.80 ringgits/$. In recent years the actual exchange rate has been between 3.1 and 3.8 ringgits/$, while the PPP-based exchange rate suggests that it should have been at less than 1.75 ringgits/$. (Note that the exchange rate is quoted as ringgits/$. When this rate goes up, the ringgit depreciates and the dollar appreciates). Malaysia (Ringgit/US$) 0.0 1.0 2.0 3.0 4.0 1980 1985 1990 1995 2000 2005 a. Can you explain why the actual exchange rate has been consistently above the exchange rate based on purchasing power parity? Under what conditions do you expect to see that the two exchange rates will converge? (5 points).

49. The market price of Stock A is 50. A customer buys a 50-strike put contract on Stock A for 500. The put contract is for 100 shares of A. Calculate the customer's maximum possible loss. (A) 0 (B) 5 (C) 50 (D) 500 (E) 5000

50. An investor bought a 70-strike European put option on an index with six months to expiration. The premium for this option was 1. The investor also wrote an 80-strike European put option on the same index with six months to expiration. The premium for this option was 8. The six-month interest rate is 0%. Calculate the index price at expiration that will allow the investor to break even. (A) 63 (B) 73 (C) 77 (D) 80 (E) 87

52. The ask price for a share of ABC company is 100.50 and the bid price is 100. Suppose an investor can borrow at an annual effective rate of 3.05% and lend (i.e., save) at an annual effective rate of 3%. Assume there are no transaction costs and no dividends. Determine which of the following strategies does not create an arbitrage opportunity. (A) Short sell one share, and enter into a long one-year forward contract on one share with a forward price of 102.50. (B) Short sell one share, and enter into a long one-year forward contract on one share with a forward price of 102.75. (C) Short sell one share, and enter into a long one-year forward contract on one share with a forward price of 103.00. (D) Purchase one share with borrowed money, and enter into a short one-year forward contract on one share with a forward price of 103.60. (E) Purchase one share with borrowed money, and enter into a short one-year forward contract on one share with a forward price of 103.75.

53. For each ton of a certain type of rice commodity, the four-year forward price is 300. A four-year 400-strike European call option costs 110. The continuously compounded risk-free interest rate is 6.5%. Calculate the cost of a four-year 400-strike European put option for this rice commodity. (A) 10.00 (B) 32.89 (C) 118.42 (D) 187.11 (E) 210.00