Question

Suppose the world real interest rate is r* = 3%, the gdp growth rates in the US and the foreign country are 6%, US monetary growth is μUS = 10%, and foreign monetary growth is μFC = 50%. Find inflation rates in both countries, πUS and πFC, nominal interest rates in both countries, iUS and iFC, and the rate of change in the foreign currency value of the $, ΔE/E. Assume the money demand parameter L is constant in both countries, expected inflation equals actual inflation, exchange rates are determined by purchasing power parity, and interest parity holds.

Answer 1

THU JANUARY 2017 solution - Gulen . For us, Real interest rale = 37. e gap growth rate = 6%. uus, monetary growth. WK 01 (005-360) for foreign 9 sest rate 237 1 0 gap growth rate 6%. Monetary growth = 50% a) Calculation of Inflation rate. 1 For us As ey C uncome elasticity of money demand) and ei (nominae Munterest rate elasticity of money demand) is not mentioned in the question FRI me neill asume the estimates 06 grien by economists . ie Tey = 2/3 i te e = -1/0 So that money demand is sensiline to changes in income than to changes lie the nominal interest WK 01 (006-359) Jormula = % P = % M - (2/3) +% Y = 10% - (2/3) x 3%. 1 T W T F 1 2 3 7 8 9 10 14 15 16 17 21 22 23 24 28 B - 2017 S S 4 5 11 12 18 19 25 26 Therefore, kus = 8%

WK01 (007-358) | SAT 1) For foreign JANUARY 2017 u 07 Here, we will assume we will assume velocity to le constant Formula % M = iPC + gap growth rate - 10% = ifct 6.1 Theeyou, if c = 44% There the concept of quantity theory of money is applied ] y cheory B Calculation of Nominal Interest Rates 1 For us - According to Fisher equation, Q Real interest rate = Nominal interest con un 3% = ius - 8.2 ius = 11% 11) Toi foreign same formula will be applied A as above 34.2 Tfc - 44.7. SUN Rate - Inflation Rate WK01 (008-357) Therefore i FC = 47% M T W T F S 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31