2018S_ECON303_midterm_sol.pdf - UNIVERSITY OF CALGARY...

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UNIVERSITY OF CALGARYDEPARTMENT OF ECONOMICSECON 303 (L1)MIDTERM TEST with Suggested SolutionsStudent Name:____________________________Student Number:_______________________Spring 2018Instructor: Aamir Ra°que HashmiMarks: 30Time: 1 hour, 15 minutesINSTRUCTIONS:1. Do not start the exam until you are told to do so.2. Write your name and student number above and on the answer booklet.3. This examination consists of3 questionsand4 printed pages(in-cluding the title page).4. Clearly show your working to get full credit.5. You are allowed to use non-programmable scienti°c calculators in thisexam.1
1. Consider the followingIS-LMmodel:C=40 + 0:8YD;I=500 + 0:1Y°5 000i;G=200;T=300;°MP±d=3:6Y°20 000iandMP=2 000:(a) Derive the equation for theIScurve. (Hint: You want an equationwithYon the left-hand side and all else on the right.)[2 marks](b) Derive the equation for theLMcurve. (Hint: It will be convenientfor later use to write this equation withion the left-hand side andall else on the right.)[2 marks](c) Solve for the equilibrium real output.[2 marks](d) Solve for the equilibrium interest rate.[2 marks](e) Solve for the equilibrium values ofCandI;and verify the valueyou obtained forYby adding upC,IandG.[2 marks][Question 1 total marks: 10]Question 2 is on the next page...2
2. Consider the following prices for government bonds in Canada and theUnited States.Assume that both government securities are one-yearbonds, paying the face value of the bond one year from now. The ex-change rate,Et, stands at CAD1.28 = USD1.00. The face values andprices of the two bonds are:Face ValuePriceCanadaCAD100.00CAD92.5926United StatesUSD100.00USD94.3396(a) Compute the nominal interest rates on the two bonds.[2 marks](b) Compute the expected next year exchange rate that is consistentwith uncovered interest parity.[2 marks](c) Your friend Susan expects the exchange rate next year to be CAD1.35= USD1.00. Which bond should she buy? Why?[2 marks](d) You expect the exchange rate next year to be CAD1.25 = USD1.00.Which bond should you buy? Why?[2 marks](e) Suppose you buy the bond with the best expected return accordingto your expected exchange rate of CAD1.25 = USD1.00. However,a year later, the actual exchange rate turns out to be CAD1.30 =

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