3. Consider two countries, A and C. At the beginning of the year, the CPI of Country A was 100, while that of Country B was 130. During the year, the money supply in Country A increased by 100%, while that in Country B remained unchanged. The velocities of money and the real GDP's of both countries also remained unchanged during the year. Consider Country A as the home country and Country C the foreign country. At the beginning of the year, the nominal exchange rate was 1 unit of home currency = 1.3 units of foreign currency. (a) Find the real exchange rate at the beginning of the year. (b) Based on the quantity theory of money and the purchasing-power parity, find the real exchange rate and the exchange rate at the end of the year. (c) Based on your findings in (b), comment on how a country's monetary policy may influence the nominal exchange rate of its currency.

3. Consider two countries, A and C. At the beginning of the year, the CPI of Country A was 100, while that of Country B was 130. During the year, the money supply in Country A increased by 100%, while that in Country B remained unchanged. The velocities of money and the real GDP's of both countries also remained unchanged during the year. Consider Country A as the home country and Country C the foreign country. At the beginning of the year, the nominal exchange rate was 1 unit of home currency = 1.3 units of foreign currency. (a) Find the real exchange rate at the beginning of the year. (b) Based on the quantity theory of money and the purchasing-power parity, find the real exchange rate and the exchange rate at the end of the year. (c) Based on your findings in (b), comment on how a country's monetary policy may influence the nominal exchange rate of its currency.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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