Question: (Assume that all long run relations hold in this question.) Once again the 1-year interest rates in Germany and the United States are -0.5%

the 1-year interest rates in Germany and the United States are -0.5%

and 1.5%, respectively. Suppose that Es/ = 2.00. (a) (8 points) The

(Assume that all long run relations hold in this question.) Once again the 1-year interest rates in Germany and the United States are -0.5% and 1.5%, respectively. Suppose that Es/ = 2.00. (a) (8 points) The Federal Reserve is targeting a 2% inflation rate over the next year. What is the expected inflation rate in Germany over this period? (b) (8 points) What was the expected exchange rate in 2020? Is the U.S. dollar expected to depreciate relative to the euro? Explain why this is the case. (8 points) Assume observed inflation over the period: us = 3.00% and GER = 2.0%. What is the expected real rate in both countries? Are they equal? Explain. What is the ex post, or observed, real rate? Does the Fisher effect holds in this scenario? (8 points) Assume real income growth in the U.S. and Germany is gus = 5% and 9GER = 2%, respectively, over the period. Suppose the European Central Bank targets an exchange rate of Es/ 1.8315 in 2022. If money growth in the US is 8%, what would the growth of the money supply in Europe have to be?

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