Exercise 5 Throughout 2012, the euro suffered significant depreciation in relation to the American dollar. Consider a monetary model to determine the nominal exchange rate as described in this chapter, where demand for money is a positive function of product and negative for domestic exchange rate, and the uncovered interest rate and purchasing power parity conditions are valid. Assume the supply of the money grows at a constant rate.

Chapter 6 • Money and Exchange Rate in the Long Run 165 Based on this model, judge if the following described situations can explain the depreciation of the euro. Justify your answers.

a. There was an increase in the US product in relation to the Eurozone.

b. There was an increase in supply for the US money in relation to the supply of Eurozone money.

c. The nominal interest rate in the United States is less than that of Europe.

d. A greater growth rate was expected in the supply of the US money in relation to the Eurozone.