Use the money market with the general monetary model, and foreign exchange (FX) market to answer the
Question:
Use the money market with the general monetary model, and foreign exchange (FX) market to answer the following questions. The questions consider the relationship between the U.K. British pound (p) and the Australian dollar ($). In the U.K., the real income (Y(p)) is 5.0 trillion, the money supply (M(p)) is p10.0 trillion, the price level (P(p)) is p4.0, and the nominal interest rate (i(p)) is 5.0% per annum. In Australia, the real income (Y($)) is 2.0 trillion, the money supply (M($)) is $8.0 trillion, the price level (P($)) is $8.0, and the nominal interest rate (i($)) is 5.0% per annum. These two countries have maintained these long-run levels. Thus, the nominal exchange rate (E($/p)) has been 2.00. Note that the uncovered interest parity (UIP) holds all the time and the purchasing power parity (PPP) holds only in the long-run. Assume that the new long-run levels are achieved within 1 year from any permanent changes in the economies. Now, today at time T, the money supply of Australia (M($)) rose to $8.24 trillion, by 3.0%, permanently. With the increase of the money supply in Australia, the Australian interest rate falls to 3.0% per annum today. Assume that Y($), Y(p), and M(p) do not change at all.
QUESTION:
Using the exact equation of the uncovered interest parity, calculatethe depreciation rate (in percent with zero decimal places) of the Australian dollar against the U.K. poundtoday,NOT over one year from today.