Mon 1:20 ,100% , ois Window Help Q Search s Problem set 9.pdf (page 1 of 2) Ques

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Mon 1:20 ,100% , ois Window Help Q Search s Problem set 9.pdf (page 1 of 2) Question 3: Currency Attach Investor A t run run Government Government devalue defend devalue/defend deva defend devaluedefend G) G) () ) ( ) () Two investors act stmultaneously. Government acts last and knowns at which node it is when it acts. Read the graph, use backward-induction, find the subgame perfect equilibrium of th dynamic game. a) In the last stage, what is the optimal government strategy Government's strategy is four actions, one for each node. b) Given the government strategy answered in question a), the rest of the game (investor A and

Explanation / Answer

Answer

A) In the last stage optimal government strategy is - 1) in case both A and B run - to devalue

2) in case A run and B dont run - to devalue

3) in case A dont run and B run - to devlaue

4) in case both dont run - to defend

C) Sub prime equilibrium in this case according to backward induction is that both A and B dont run and government defends. As in this case the payoff matrix has the highest return.

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