3. Consider two countries: The United States and the United Kingdom. In 2014, growth in both...

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3. Consider two countries: The United States and the United Kingdom. In 2014, growth in both economies, as measured by their GDP growth were similar at 2.3% for the US and 3.0% for the UK. Assume that these growth rates are expected to remain the same for several years to come in both the US and the UK. Suppose that the current US money growth rate of 6% annually, while the UK chooses to match its GDP growth rate and grow the money supply by 3% annually. Consider the US as the Home country and the UK as the Foreign country. Use the quantity theory to answer the following questions (L constant) (20 pts.) a. What is the expected inflation rate in the US and in the UK? b. What is the expected rate of appreciation or depreciation of the British Pound versus the US Dollar on an annual basis? C. If the UK desired the British Pound to depreciate versus the US Dollar by 2% annually in order to fuel export growth, what policy decision would it undertake? Name one potential downside of this decision for the UK's citizens. d. Draw the time series diagrams to illustrate the effects of a reduction in the growth rate of money supply in the US from 6% to 3%. Assume that the UK leaves its money growth rate constant. Show the effects, if any, on the US money supply, the US interest rate, the price level, the real money balances and E$/£. 4. Beginning with the facts in question 3, now use the general monetary model where Lis no longer assumed constant, but inversely related to interest rates. Assume the US nominal interest rate is currently 4% annually. (20 pts.) a. Given the conditions in 3.a. what is the UK nominal interest rate? b. Demonstrate that the real interest rate in the UK is equal to the real interest rate in the US. c. Use the inflation facts from 3.b. If the UK desired the British Pound to depreciate versus the US Dollar by 2% annually in order to fuel export growth, what policy decision might the UK undertake? Name one potential downside of this decision for the UK's citizens. d. Draw the time series diagrams to illustrate the effects of a reduction in the growth rate of money supply in the US from 6% to 3%. Assume that the UK leaves its money growth rate constant. Show the effects, if any, on the US money supply, the US interest rate, the price level, the real money balances and E$/£. 3. Consider two countries: The United States and the United Kingdom. In 2014, growth in both economies, as measured by their GDP growth were similar at 2.3% for the US and 3.0% for the UK. Assume that these growth rates are expected to remain the same for several years to come in both the US and the UK. Suppose that the current US money growth rate of 6% annually, while the UK chooses to match its GDP growth rate and grow the money supply by 3% annually. Consider the US as the Home country and the UK as the Foreign country. Use the quantity theory to answer the following questions (L constant) (20 pts.) a. What is the expected inflation rate in the US and in the UK? b. What is the expected rate of appreciation or depreciation of the British Pound versus the US Dollar on an annual basis? C. If the UK desired the British Pound to depreciate versus the US Dollar by 2% annually in order to fuel export growth, what policy decision would it undertake? Name one potential downside of this decision for the UK's citizens. d. Draw the time series diagrams to illustrate the effects of a reduction in the growth rate of money supply in the US from 6% to 3%. Assume that the UK leaves its money growth rate constant. Show the effects, if any, on the US money supply, the US interest rate, the price level, the real money balances and E$/£. 4. Beginning with the facts in question 3, now use the general monetary model where Lis no longer assumed constant, but inversely related to interest rates. Assume the US nominal interest rate is currently 4% annually. (20 pts.) a. Given the conditions in 3.a. what is the UK nominal interest rate? b. Demonstrate that the real interest rate in the UK is equal to the real interest rate in the US. c. Use the inflation facts from 3.b. If the UK desired the British Pound to depreciate versus the US Dollar by 2% annually in order to fuel export growth, what policy decision might the UK undertake? Name one potential downside of this decision for the UK's citizens. d. Draw the time series diagrams to illustrate the effects of a reduction in the growth rate of money supply in the US from 6% to 3%. Assume that the UK leaves its money growth rate constant. Show the effects, if any, on the US money supply, the US interest rate, the price level, the real money balances and E$/£.

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Question 3a What is the expected inflation rate in the US and in the UK Answer According to the quantity theory of money the inflation rate is equal to the growth rate of the money supply minus the gr... View the full answer