Consider two countries, East and West, that produce and trade two goods, Food and Clothing, using skilled and unskilled labor. Each unit of Food requires 1 unit of unskilled labor and 2 units of skilled labor to produce. Each unit of Clothing requires 2 units of unskilled labor and 1 unit of skilled labor to produce. East has 900,000 unskilled workers and 600,000 skilled workers. West has 600,000 unskilled workers and 900,000 skilled workers. The rate of time preference is γ = 0.1 and the relative demand curve is:

where cit is the price of good i and Pit is the consumption of good i. The money supply in East is permanently kept at 1 million East dollars (denoted E$), and the money supply in West is permanently kept at 1 million West dollars (W$). Calculate:
(a) The supply of both goods in each country, the world relative supply, and the relative price.
(b) The nominal price of each good in each currency, and the equilibrium exchange rate.
(c) Real and nominal interest rates in each currency.
(d) Finally, describe briefly how the calculations in (a) through (c) would change if the money supply in East was doubled. Would welfare in either country change?

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