3. Consider two countries, A and C. At the beginning of the year, the CPI of Country A was 100, while that of Country B was 130. During the year, the money supply in Country A increased by 100%, while that in Country B remained unchanged. The velocities of money and the real GDP's of both countries also remained unchanged during the year. Consider Country A as the home country and Country C the foreign country. At the beginning of the year, the nominal exchange rate was 1 unit of home currency = 1.3 units of foreign currency. (a) Find the real exchange rate at the beginning of the year. (b) Based on the quantity theory of money and the purchasing-power parity, find the real exchange rate and the exchange rate at the end of the year. (c) Based on your findings in (b), comment on how a country's monetary policy may influence the nominal exchange rate of its currency.
3. Consider two countries, A and C. At the beginning of the year, the CPI of Country A was 100, while that of Country B was 130. During the year, the money supply in Country A increased by 100%, while that in Country B remained unchanged. The velocities of money and the real GDP's of both countries also remained unchanged during the year. Consider Country A as the home country and Country C the foreign country. At the beginning of the year, the nominal exchange rate was 1 unit of home currency = 1.3 units of foreign currency. (a) Find the real exchange rate at the beginning of the year. (b) Based on the quantity theory of money and the purchasing-power parity, find the real exchange rate and the exchange rate at the end of the year. (c) Based on your findings in (b), comment on how a country's monetary policy may influence the nominal exchange rate of its currency.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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