1. Shocks to the money growth rate. Take the two-country model of section 10.1, but allow for steady-state money growth such that M/M-1=1+ and M/M = 1+*. Assume that in the initial steady state = u*.

(a) How must eqs. (26), (37), (38), (39), (50), (51), and (52) be revised when > 0?

(b) Suppose there are short-run, one-period price rigidities as in the text and analyze the short-run impact on the exchange rate of an unanticipated permanent rise in the home rate of money growth from u to u', holding a constant. You may use a diagram analogous to Figure 10.1; it is not strictly necessary to solve for the closed- form solution.