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2. The central bank of the home country is currently pegging to the U.S. dollar at E=1 peso per dollar. Currently (in year t), the

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2. The central bank of the home country is currently pegging to the U.S. dollar at E=1 peso per dollar. Currently (in year t), the level of money supply (M) is 1,331 pesos, domestic credit (B) is 1,000, and reserves (R) are 331 pesos. Inflation is currently 0, prices are flexible, PPP holds at all times. P and P* are 1. Suppose that, to finance government spending, B is growing at 10% per year. The central bank will keep the peg until it runs out of reserves. a. Assume that investors are myopic and do not foresee the reserves running out. Calculate the levels of money supply (M), domestic credit (B), and reserves (R) in years t, t+1, 1+2, t+3, 1+4, and t+5. In what year will the country shift to float? b. Assume now that investors are rational and know the rate at which domestic credit is growing. Also assume that when the interest rate rises by 10%, the amount of real money demand falls by 231 pesos. In what year will the country shift to float? 2. The central bank of the home country is currently pegging to the U.S. dollar at E=1 peso per dollar. Currently (in year t), the level of money supply (M) is 1,331 pesos, domestic credit (B) is 1,000, and reserves (R) are 331 pesos. Inflation is currently 0, prices are flexible, PPP holds at all times. P and P* are 1. Suppose that, to finance government spending, B is growing at 10% per year. The central bank will keep the peg until it runs out of reserves. a. Assume that investors are myopic and do not foresee the reserves running out. Calculate the levels of money supply (M), domestic credit (B), and reserves (R) in years t, t+1, 1+2, t+3, 1+4, and t+5. In what year will the country shift to float? b. Assume now that investors are rational and know the rate at which domestic credit is growing. Also assume that when the interest rate rises by 10%, the amount of real money demand falls by 231 pesos. In what year will the country shift to float

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