3. TRUE/FALSE/MAYBE and EXPLAIN: (4 MARKS). (Maximum length: one page) "A government sells a large amount of new bonds to finance an immediate cut in personal income taxes. According to the Loanable Funds and Money Market models this will lower short- and long-run real interest rates (ceteris paribus)."

1. Given the above variable cost data and assuming fixed costs equal the value of the last four digits of your MDC student ID, create a file using Excel that lists Output, Fixed Cost, Variable Cost, Total Cost, Average Fixed Cost, Average Variable Cost, Average Total Cost, and Marginal Cost. The Excel table should be constructed using formulas wherever calculations are required. An example of the table for guidance is presented on page 254 of your textbook. The formulas required are summarized on page 262. 2. Using Excel, plot FC, VC, and TC in Graph A and AFC, AVC, ATC, and MC in Graph B. 3. Remember to submit two separete graphs labeled A and B as stated above.

Use the IS-LM model and create an enlarged version of figure 1 to answer the following question. Suppose in period 1 that the

2. Suppose the U.S. Federal Reserve is gradually reducing its money supply to raise its interest rate over time. The higher rate of return in the U.S. causes investors to selling foreign currency and purchase dollars, causing capital to flow out of emerging (non U.S.) economies and into the U.S. Consider the implications for an emerging economy. (a) Suppose there is free capital mobility. If the emerging economy pegs its currency to the U.S. dollar, what happens to the interest rate in the emerging economy over time (increase, decrease, stay the same, or can't determine)? What happens to output as a result? (b) The emerging economy would like to stabilize output in the short-run through monetary policy but has run out of reserves of U.S. dollars. What are the two specific policy options available (be precise, and use one sentence for each option)?

3. During the late 19th and early 20th centuries, the U.S. and many other nations adhered to the gold standard. Under the gold standard, a country aimed to sustain a target value of currency in terms of gold. In other words, the gold standard is simply a fixed exchange rate regime, except for pegging the domestic currency to a foreign currency, the domestic currency is pegged to a unit of gold. For instance, the U.S. may have pegged the dollar to gold at, say, $35 per ounce. If market forces put upward pressure on the dollar price of gold, the U.S. would need to intervene by selling gold reserves in order to increase the supply of gold and reduce the supply of dollars in order to drive the value of the dollar up the the dollar price of gold down. Thus, the government needs to have sufficient gold held in reserves in order to maintain the peg. When many countries simultaneously adhere to the gold standard, then their foreign-currency exchange rates are also fixed. (a) By the beginning of World War I the United States had accumulated a majority of the world's gold reserves. Explain in a few sentences why this forced foreign countries to abandon the gold standard. (b) After the gold standard dissolved, many countries instead pegged their currency to the U.S. dollar. By the end of World War II, most advanced countries, including the U.S., entered the Bretton Woods system whereby their exchange rates were fixed and the dollar was convertible to gold. During the 1960s the U.S. economy was booming above full employment. Through the lense of the IS-LM (Mundell- Fleming) model we can think of this as a temporary positive demand shock. Was it possible for the Federal Reserve to cool down the economy and bring it back to full employment? Justify your answer using a diagram like that in Figure 1. (c) Based on your answer in part (b), what would be the implications for the relative inflation rate of the U.S., relative to the rest of the world? Is this consistent with the data? (Hint: You will also need to make use of relative PPP.) To answer the last part, look up inflation data from Federal Reserve Economic Data (FRED) to examine inflation rates in the U.S., Japan, France, and the United Kingdom.

TOPIC: Soybean Export Tax QUESTION: Suppose that the export demand curve for soybeans from Argentina is PD=575 - 15XD, and Argentina's export supply curve is PS = 50+ 15XS. (Prices are in dollars per metric ton and quantities are in millions of metric tons.) Calculate the free-market equilibrium. Now suppose that a 29% ad valorem tax is levied on soybean exports. Calculate the new equilibrium, including the new level of exports, the domestic price, the world price, and government export tax revenues. Show your work.

1. Farah is a Mocha Latte lover. Her demand function for Mocha Lattes is given by: Q = 20-3P Where Q and P denote the quantity and price of Mocha Lattes, respectively. Let the market equilibrium price for a cup of Mocha Latte be 4 KD. Answer the following questions: a. Calculate the price elasticity of Farah's demand for Mocha Lattes using the point elasticity method at a price of 1 KD. b. Derive Farah's marginal benefit function from drinking Mocha Latte. c. What is the equilibrium quantity of Mocha Lattes will Farah end up buying? d. Draw a rough sketch of Farah's demand curve and show all intersections with the horizontal and vertical axes. e. Label the consumer surplus area and the total expenditures area on your graph in part (d). f. Calculate Farah's total expenditure on Mocha Lattes. g. Calculate Farah's consumer surplus from consuming Mocha Lattes using the following approaches: i. Geometric area based on your sketch in part (d). ii. Integration h. Calculate the extra gain that Farah gets in her consumer surplus when the Mocha Latte price reduces to 2 KD. i. Label the area associated with the gain found on part (h) on a new rough sketch. Label the critical points that define the location and size of that area on the vertical and horizontal axes.

1. Multiple Choice Question 1.A Assume that a Peruvian company, DMB LLC, just reported its earnings this year (year 0). The reported revenue was $9 million and the reported cost was $10 million. Its revenue is expected to grow 6% annually, while its cost is expected to grow 2% annually. Mark ALL the CORRECT statements. For this question, profit revenue - cost. First, apply the Gordon Formula to calculate the present value of all future revenues and the present value of all future costs separately. Then, calculate the present value of all future profits, which equals the present value of all future revenues minus the present value of all future costs. a) The first year that the profit of the company becomes positive is year 3. b) If the discount rate is 12%, the present value of all future profits of the company is $50 million. c) If the discount rate is 10%, the present value of all future profits of the company is $111 million. d) If the discount rate is 5%, the present value of all future profits of the company is infinite. e) The present value of all future profits of the company is always positive no matter what the discount rate is. 1.B Suppose the capital share in Canada is a = 2/5. Mark ALL the CORRECT statements. For this question, use the growth accounting formula given in class. a) If capital increases by 10%, labor hours increase by 5%, and total output increases by 10% relative to last year, then TFP should decrease by 1%. b) If capital increases by 15%, labor hours decrease by 5%, and TFP increases by 5% relative to last year, then total output should increase by 5%. c) If capital increases by 10%, TFP increases by 10%, and total output increases by 10% relative to last year, then labor hours should increase by 10%. d) If labor hours increase by 10%, TFP increases by 5%, and total output increases by 15% relative to last year, then capital should increase by 1%. e) None of the above. 1.C Suppose the Federal Reserve sells Treasury Bills and Treasury Bonds in the open market. Compared to a scenario in which no such open market operations took place, which of the following answers are CORRECT? a) Banks short of reserves end up with more loans. b) Banks short of reserves end up with the same amount of deposits. c) Banks short of reserves end up with more equities. d) The federal funds rate is lower. e) The money supply is lower.

a. Using the point elasticity method, derive an equation for the income elasticity of demand for toys. b. Using the point elasticity method, derive an equation for the cross elasticity of demand for toys relative to bike's price. c. Are toys normal or inferior goods? Why? d. Are toys and bikes substitutes or complements? Why? e. Calculate the income elasticity of demand for toys for a consumer that purchases 20 toys and has an income of 400 KD. f. Calculate the cross elasticity of demand for toys relative to bike's price for a consumer that purchases 20 toys when the price of a bike is 12 KD. g. Using the arc elasticity method, calculate the price elasticity of demand for toys for a consumer that has an income of 400 KD if the price of a bike is 12 KD and the price of a toy changes from 1 KD to 2 KD. h. Determine whether demand is elastic, inelastic, or unit elastic based on your calculation in part (g). i. Using the point elasticity method, calculate the price elasticity of demand for toys for a consumer that has an income of 400 KD if the price of a bike is 12 KD and the price of a toy is 2 KD. j. Determine whether demand is elastic, inelastic, or unit elastic based on your calculation in part (i). k. Write down the total revenue function as a function of P, when income is 500 KD and the price of a bike is 8 KD. l. Use the total revenue test to determine the range of prices where the demand for toys is elastic and the range where it becomes inelastic.

2. Ricardian Equivalence VS Government with Money (30 Points).