ECON 3P03 Lecture Notes - Foreign Exchange Spot, Rational Expectations, Independent And Identically Distributed Random Variables

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yelloweagle690

19 Dec 2013

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A change in the way a variable moves (structural shift), changes the way expectations are formed. Agents will take into account the structural change when forming expectations. Suppose that the time-series properties of the exchange rate change as follows: The rational expectation of the spot exchange rate at time t+1, is now given by: Equation (14) demonstrates that under rational expectations agents utilize past shocks that are known ( ) to predict future shocks and improve their forecasts. The prediction error is random and zero on average. 3. efficient markets theory it is the application of rational expectations theory to the pricing of securities. A simple model of stock return is that it should remain constant over time ( , differ from their rational expectation only by a random forecasting error, , which is serially uncorrelated with mean zero, the evolution of stock prices is given by (18) or.

Related Questions

QUESTION 5

Which of the following statements has been proposed as a benefit of passive policy making?

		Passive policy making utilizes the rational expectations hypothesis.
		Passive policy making allows for making immediate changes in response to an anticipated change in economic performance.
		When using passive policy making there is no tradeoff between price stability and unemployment.
		Passive policy making does not wait for the time lag between recognition of a problem and policy action before engaging in economic policies to stabilize the economy.

1.47 points

QUESTION 6

The idea of policy making taking place in response to a predetermined set of rules is referred to as

		discretionary policy making.
		passive policy making.
		Keynesianism.
		active policy making.

1.47 points

QUESTION 7

What types of unemployment will still exist when the economy is at the natural rate of unemployment?

		frictional and cyclical unemployment only
		frictional, structural, and cyclical unemployment
		frictional and structural unemployment only
		structural and cyclical unemployment only

1.47 points

QUESTION 8

The natural rate of unemployment is

		the unemployment rate that exists in long-run equilibrium, after adjustments to all changes have occurred.
		the unemployment rate when there is no structural unemployment.
		the unemployment rate when there is no structural or cyclical unemployment.
		zero.

1.47 points

QUESTION 9

According to the text, minimum-wage laws cause increases in

		employment possibilities.
		structural unemployment.
		poverty.
		productivity.

1.47 points

QUESTION 10

During a recession, the overall unemployment rate

		exceeds the natural rate of unemployment.
		falls below the natural rate of unemployment.
		falls rapidly.
		equals the inflation rate.

1.47 points

QUESTION 11

Cyclical unemployment is

		the unemployment due to the unemployment benefits and welfare programs of the government.
		the unemployment due to union activities and government-imposed restrictions to entry into specific occupations.
		the difference between the actual unemployment rate and the natural rate of unemployment.
		the difference between the unemployment rate when the economy is in a recession and the unemployment rate when the economy is at the peak of an expansion.

1.47 points

QUESTION 12

Which of the following unemployment rates can be negative?

		the natural unemployment rate
		the seasonal unemployment rate
		the official unemployment rate reported by the Bureau of Labor Statistics
		the cyclical unemployment rate

1.47 points

QUESTION 13

An unexpected increase in aggregate demand typically causes

		the price level to increase but has no effect on the unemployment rate.
		frictional unemployment to increase but structural unemployment to decrease.
		the price level to increase and the unemployment rate to fall.
		the price level to increase and the unemployment rate to increase.

1.47 points

QUESTION 14

The rate of unemployment below which the rate of inflation tends to rise and above which the rate of inflation tends to fall is known as the

		non-accelerating-inflation rate of unemployment (NAIRU).
		contrary rate of unemployment.
		Phillips rate of unemployment.
		menu cost rate of unemployment.

1.47 points

QUESTION 15

Based on the work of economist A.W. Phillips, economists concluded that

		high inflation rates are associated with low unemployment rates.
		higher rates of inflation are associated with higher rates of unemployment.
		there is no trade-off between inflation and unemployment.
		unemployment can be effectively combated by raising wages.

burgundypug78

Section I: Supply & Demand Analysis (Chapter 3) In each of the following 10 questions, show what happens to the Demand, Supply, equilibrium price and equilibrium quantity of copper. Show an increase by use of +, a decrease with a -, and no change with 0 (thatâs a zero, not an O or o). Although in the real world, both supply and demand are constantly changing, in the model we are using here, only one curve shifts per problem. So, if demand goes + or -, supply will be 0, and vice versa. In no case will equilibrium price or equilibrium quantity be 0. You may want to sketch out the supply and demand curve analysis to help in answering the questions. You will also be required to identify which determinant (of demand or supply) has changed, thus causing the shift. Rather than actually writing in the determinant, fill in the blank with the number that corresponds to the relevant determinant, based upon the following list. You may want to refer to the lecture notes entitled Determinants of Demand & Supply in the COURSE CONTENTS section. For questions 1 - 10, refer back to this list. Some you may want to use more than once, some you won't use at all. Copy and paste this list to an MS Word document and then print it out if you don't want to keep scrolling back and forth between this list and the question you're trying to answer. Determinants of Demand: 1. Change in buyer tastes 2. Change in number of buyers 3. Change in income 4. Change in the prices of related goods (on the demand side) 5. Change in consumer expectations Determinants of Supply: 6. Change in resource prices 7. Change in technology 8. Changes in taxes and subsidies 9. Change in prices of related goods (on the supply side) 10. Change in producer expectations 11. Change in the number of suppliers. For example, if a rightward shift in the supply curve for an item were caused by an increase in the number of producers of that item, you would indicate this be entering 11 into the relevant blank. If the demand curve shifted to the left because people didn't like that item anymore (like mimeograph machines), you'd enter 1 into the blank. Q#1 President Trump signs into law a bill that says the U.S. government will subsidize the construction of new homes, office buildings, bridges, and other infrastructure projects requiring copper. Demand; Supply: Equilibrium Price: Equilibrium Quantity Exchanged; Which determinant changed?: Q#2 Non-capitalist economies around the world begin a phase of rapid economic development, construction and growth, becoming increasingly wealthy, as they begin to adopt more capitalist institutions, as in China, Russia, and the former communist countries of East Europe. Demand; Supply: Equilibrium Price: Equilibrium Quantity Exchanged: Which determinant changed?

Please no cursive or typed out

1. (65 points total).

a) (5 points) Fill in the Table below.

Number of workers	Units of output	MPN
0	0
1	20
2	38
3	53
4	66
5	77
6	86
7	93

b. (10 points) Define the marginal product of labor and explain how it relates to the production function (with N on horizontal axis and Y on vertical axis). What shape does a production function typically take and why? Does this production function take the 'typical' shape?

c)(5 points) Assume that you sell your output to Europe for a US price = $10. The exchange rate is this time is $1.07 per Euro. What is the price of your product in Euros? Please round to 2 decimal places.

d) (5 points) You can hire all the workers you want at $80 per worker. Along with the US price = $10, calculate the number of workers that you will hire and the associated profit in REAL terms (as we did in class, we 'assume away' all other costs of production). Please give me the marginal REAL profit of each worker hired and then add them up and that is the total profit in real terms.

e)(5 points) Inflation data in the US is weaker than the Fed would like and thus, expectations change such that the Fed is less likely to raise interest rates. As a result, the new and updated exchange rate is $1.23 per Euro. What has happened to the value of the US dollar and what is the new Euro price of your product, assuming that your American price stays at $10?

f).(5 points) Given the change in conditions you decide to raise the price of your product in US dollar terms so that the Euro price stays the same as it was before the change in the exchange rate (part c above). What is the new US dollar price? Please show all work.

g) (10 points) What has happened to the marginal revenue product (MRPN) for each worker (has it gone up or down?) and why given the change in price? Be sure to define what the marginal revenue product is and what it means in 'laypersons' terms.

h) (10 points) Given that the US$ price of your product has changed, explain how and why you would change your behavior. Please provide the intuition beginning your answer with... at the same level of labor input I am no longer ......... (please be as specific as possible). Again, explain in REAL terms, not nominal terms.

i. (5 points) Calculate the new level of profits in REAL terms given the change in condition including the change in the exchange rate, the change in the US $ price of your product. and the change in your behavior.

j)(5 points) The Fed has had its eye on inflation for a long time and have been disappointed in that inflation has been too low. Is the change in the value the dollar vs the Euro a welcome development for the Fed? Why or why not? Assume that these conditions changed in a similar way for many US firms.

ECON 3P03 Lecture Notes - Foreign Exchange Spot, Rational Expectations, Independent And Identically Distributed Random Variables

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