EBK MACROECONOMICS
EBK MACROECONOMICS
5th Edition
ISBN: 8220106773925
Author: KRUGMAN
Publisher: MAC HIGHER
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Chapter 12, Problem 15P
To determine

Concept Introduction:

Inflation: It is defined as the continuous rise in price of all the goods and services for a span of time in the economy.

Gross Domestic Product (GDP): It is defined as the value of output which is produced domestically that is inside the borders of the country in the given interval of time.

Aggregate Demand Curve ( AD ): It shows how price and the quantity demanded are related to each other. The curve is negatively slopped which means that when prices rise the quantity demanded falls.

Aggregate Supply Curve ( AS ): It shows how price and the quantity supplied are related to each other. The curve is positively slopped which means that when prices rise, the quantity supplied also rises. The curve depends on the duration of time.

Short Run Aggregate Supply ( SRAS ): It is a positively slopped curve in which supply increases when price rises.

Long Run Aggregate Supply ( LRAS ): It is a vertical curve which is independent of time. When price increases there is no change in quantity supplied.

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Consider a call option on a stock that does not pay dividends. The stock price is $100 per share, and the risk-free interest rate is 10%. The call strike is $100 (at the money). The stock moves randomly with u=2 and d=0.5. 1. Write the system of equations to replicate the option using A shares and B bonds. 2. Solve the system of equations and determine the number of shares and the number of bonds needed to replicate the option. Show your answer with 4 decimal places (x.xxxx); do not round intermediate calculations. This is easy to do in Excel. A = B = 3. Use A shares and B bonds from the prior question to calculate the premium on the option. Again, do not round intermediate calculations and show your answer with 4 decimal places. Call premium =
Answer these questions using replication or the risk neutral probability. Both methods will produce the same answer. Show your work to receive credit. 6. What is the premium of a call with a higher strike. Show your work to receive credit; do not round intermediate calculations. S0 = $100, u=2, d=0.5, r=10%, strike=$150
Answer these questions using replication or the risk neutral probability. Both methods will produce the same answer.
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