solve the following questions... wel explained answers

2. For each of the following, illustrate the shift of one of the curves in the AS/AD model: a Business confidence rises as firms expect an increase in GDP, sales, and profits. b. A rise in inflation increases people's expectations of inflation in the medium run. c. The distribution of high speed internet to rural areas boosts productivity. 3. Illustrate the following periods of history with the AS/AD model: a. Government spending for the Vietnam War during the late 1960s pushed up the rate of inflation from about 1% to 5%. b. In 1973-74, OPEC engaged in an oil embargo, causing an increase in oil prices. Inflation rose to above 9% in 1975, and the unemployment rate rose above 8%. (Illustrate the immediate effect.) c. After another oil price shock in 1979, the Fed conducted a contractionary monetary policy (choosing a lower target inflation rate). Inflationary expectations fell. The unemployment rate rose to almost 10%, but inflation fell from 9% to 4%. d. The 1990s brought an era of innovation, increasing global competition, and weakened unions from years of anti-union government policies. By 1998, the unemployment rate was 4.4% and inflation was 1.6%.3. (a) (5 points) Suppose a small open economy with a fixed exchange rate discovers oil reserves. As a result, the economy's households expect higher incomes in the future. Assuming households are forward-looking, discuss the effects of this "news" on income, exchange rate, trade balance, and the composition of aggregate demand. Does the central bank of the country accumulates or runs down its foreign exchange reserves? (Use the Mundell-Fleming model; draw the graphs.) (b) (5 points) Suppose an open economy with a floating exchange rate sets the target of a stable output, and all the shocks in the economy are the shocks to desired invest- ment. Which policy should the cental bank implement to achieve the target-keeping the money stock constant or adjusting the money stock to keep the exchange rate con- stant? (Use the Mundell-Fleming model; draw the graphs.) (c) (5 points) Suppose that foreigners impose quota on its households' purchases of the goods produced in our (domestic, small open) economy with a floating exchange rate. Discuss the effects of this policy on the exchange rate, and the economy's trade balance, income, and the volume of exports and imports. (Use the Mundell-Fleming model; draw the graphs.) (d) (5 points) What is the essence of the Lucas critique? Discuss the issue in terms of either the consumption function or the short-run inflation-unemployment tradeoff (e) (5 points) Suppose an economy's production function is described as Y = AK, A =0.5; its working population is constant; the savings rate is 0.2; and the depreciation rate is 0.05. What is the growth rate in output per worker in this economy? Is there any steady state in terms of capital per worker and output per worker? (f) (5 points) Consider a closed Solow economy with no population and technological growth at its steady state. Suppose there is a sudden inflow of immigrants into the economy that raises working population. Assume that this is the only change in the economy, and the fundamental parameters of the economy such as the savings rate, the aggregate technology, depreciation rate, population and technological growth rates remain unaltered. Briefly discuss the changes in the economy in the short and very long runs: focus your discussion on the changes in capital per worker, output per worker, the real wage and the real interest rate. Draw a Solow diagram.1. Determine which statement about zero-cost purchased collars is FALSE (A) A zero-width, zero-cost collar can be created by setting both the put and call strike prices at the forward price. (B) There are an infinite number of zero-cost collars. (C) The put option can be at-the-money. (D) The call option can be at-the-money. (E) The strike price on the put option must be at or below the forward price. 2. You are given the following: . The current price to buy one share of XYZ stock is 500. . The stock does not pay dividends. The continuously compounded risk-free interest rate is 6%. . A European call option on one share of XYZ stock with a strike price of K that expires in one year costs 66.59. A European put option on one share of XYZ stock with a strike price of & that expires in one year costs 18.64. Using put-call parity, calculate the strike price, K. (A) 449 (B) 452 (C) 480 (D) 559 (E) 582 IFM-01-18 Page 2 of 105 3. Happy Jalapenos, LLC has an exclusive contract to supply jalapeno peppers to the organizers of the annual jalapeno eating contest. The contract states that the contest organizers will take delivery of 10,000 jalapenos in one year at the market price. It will cost Happy Jalapenos 1.000 to provide 10,000 jalapenos and today's market price is 0.12 for one jalapeno. The continuously compounded risk-free interest rate is 6%. Happy Jalapenos has decided to hedge as follows: Buy 10,000 0.12-strike put options for 84.30 and sell 10,000 0.14-stike call options for 74.80. Both options are one-year European. Happy Jalapenos believes the market price in one year will be somewhere between 0.10 and 0.15 per jalapeno. Determine which of the following intervals represents the range of possible profit one year from now for Happy Jalapenos. (A) -200 to 100 (B) -110 to 190 (C) -100 to 200 (D) 190 to 390 (E) 200 to 4008. Joe believes that the volatility of a stock is higher than indicated by market prices for options on that stock. He wants to speculate on that belief by buying or selling at-the- money options. Determine which of the following strategies would achieve Joe's goal. (A) Buy a strangle (B) Buy a straddle (C) Sell a straddle (D) Buy a butterfly spread (E) Sell a butterfly spread IFM-01-18 Page 5 of 105 9. Stock ABC has the following characteristics: The current price to buy one share is 100. . The stock does not pay dividends. European options on one share expiring in one year have the following prices: Strike Price Call option price Put option price 90 14.63 0.24 100 6.80 1.93 110 2.17 6.81 A butterfly spread on this stock has the following profit diagram. A NO 85 90 95 100 106 110 115 120 The continuously compounded risk-free interest rate is 5%. Determine which of the following will NOT produce this profit diagram. (A) Buy a 90 put, buy a 110 put, sell two 100 puts ) Buy a 90 call, buy a 110 call, sell two 100 calls (C) Buy a 90 put, sell a 100 put, sell a 100 call, buy a 110 call (D) Buy one share of the stock, buy a 90 call, buy a 110 put, sell two 100 puts