The following are my questions answer them correctly
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.8. 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 puts37. A one-year forward contract on a stock has a price of $75. The stock is expected to pay a dividend of $1.50 at two future times, six months from now and one year from now, and the annual effective risk-free interest rate is 6%. Calculate the current stock price. (A) 70.75 (B) 73.63 (C) 75.81 (D) 77.87 (E) 78.04 IFM-01-18 Page 18 of 105 38. The current price of a medical company's stock is 75. The expected value of the stock price in three years is 90 per share. The stock pays no dividends. You are also given i) The risk-free interest rate is positive. ii) There are no transaction costs. iii) Investors require compensation for risk. The price of a three-year forward on a share of this stock is X, and at this price an investor is willing to enter into the forward. Determine what can be concluded about X. (A) X K. Determine an algebraic expression for the investor's profit at expiration. (A) Ce" (B) C(1+m)-S+K (C) Ce" -S+ K (D) Ce" +K(1-e" ) (E) C(1+r) +K[1-(+r)' ] IFM-01-18 Page 21 of 105 43. You are given: i) An investor short-sells a non-dividend paying stock that has a current price of 44 per share. ii) This investor also writes a collar on this stock consisting of a 40-strike European put option and a 50-strike European call option. Both options expire in one year. The prices of the options on this stock are: Strike Price Call option Put option 40 8.42 2.47 50 3.86 7.42 iv) The continuously compounded risk-free interest rate is 5%. v) Assume there are no transaction costs. Calculate the maximum profit for the overall position at expiration
