1) In this problem, you'll draw some time series graphs in an example that is more...

 

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1) In this problem, you'll draw some time series graphs in an example that is more or less the opposite of the one done in the book/slides. For this problem, assume that the USA is the home country and assume that the liquidity preference variable L of both countries is constant (1.e. L is not a function of the interest rate). Suppose, initially, that the real GDP growth rates of USA and Canada are both 0% and that the nominal money supply growth rate of Canada is 0%. The nominal money supply growth rate of the US is initially 25%, but at time T, the US money supply growth rate decreases to 1%. Draw what happens to nominal money M, real money M/P, the US price level P, and the US dollar per Canadian dollar exchange rate Es/CAD over time, being careful to indicate point T on each graph. You may use the axes drawn for you, but if you draw your own, please be neat and use a straight edge to draw your axes, and label them. [40% ] M/P M P ES/CAD t 2) Suppose the liquidity preference variables L for the US and Canada are both constant. The real GDP growth rate of the US is 3.1% and the nominal money supply growth rate of the US is 2.2%. The real GDP growth rate of Canada is 2.8% and the nominal money supply growth rate of Canada is 1.5%. Solve for the US inflation rate, the Canadian inflation rate, and the depreciation rate of the US dollar against the Canadian dollar. [18%) 3) Using the approximation for UIP from chapter 2 and the formula for relative PPP, derive the Fisher effect algebraically. [20% ] 4) Using 3), derive the formula for the world real interest rate. [12%] 5) How does a real interest rate differ from a nominal interest rate? [10% ] 1) In this problem, you'll draw some time series graphs in an example that is more or less the opposite of the one done in the book/slides. For this problem, assume that the USA is the home country and assume that the liquidity preference variable L of both countries is constant (1.e. L is not a function of the interest rate). Suppose, initially, that the real GDP growth rates of USA and Canada are both 0% and that the nominal money supply growth rate of Canada is 0%. The nominal money supply growth rate of the US is initially 25%, but at time T, the US money supply growth rate decreases to 1%. Draw what happens to nominal money M, real money M/P, the US price level P, and the US dollar per Canadian dollar exchange rate Es/CAD over time, being careful to indicate point T on each graph. You may use the axes drawn for you, but if you draw your own, please be neat and use a straight edge to draw your axes, and label them. [40% ] M/P M P ES/CAD t 2) Suppose the liquidity preference variables L for the US and Canada are both constant. The real GDP growth rate of the US is 3.1% and the nominal money supply growth rate of the US is 2.2%. The real GDP growth rate of Canada is 2.8% and the nominal money supply growth rate of Canada is 1.5%. Solve for the US inflation rate, the Canadian inflation rate, and the depreciation rate of the US dollar against the Canadian dollar. [18%) 3) Using the approximation for UIP from chapter 2 and the formula for relative PPP, derive the Fisher effect algebraically. [20% ] 4) Using 3), derive the formula for the world real interest rate. [12%] 5) How does a real interest rate differ from a nominal interest rate? [10% ]

Answer rating: 100% (QA)

M Initially the nominal money supply growth rate of the US is 2 so the nominal money supply M increases at a steady rate At time T the growth rate decreases to 1 so the slope of the graph becomes less ... View the full answer