4) [10 marks] Exchange Rates: Asset Markets. We are examining the monetary model where prices are inflexible in the short-run but flexible in the long run. This question considers the relationship between the Chinese yuan (CNY) and the U.S. dollar (USD). The exchange rate is in yuan per dollar, CNY/USD. At time t=0 the demand for real money balances in both the U.S.A. and China is now given by: In- -= 2-6i + lny P Where i = ln (1 + i) is the log nominal interest rate. Assume that the money supply M and real income Y in China and the U.S. have been stable for a very long time, with zero growth rates and zero expected growth rates. For the values of Y, M, and the log world real interest rate in Table 1 below (where XX equals the last two digits of your student number), calculate: a) [2 marks] The nominal interest rate in China and the U.S.A. (in log terms) if Real Interest Parity holds. b) [4 marks] The equilibrium natural log price levels InP in China and the U.S.A.; c) [2 marks] The equilibrium natural log real money balances in in China and the U.S.A.; d) [2 marks] The log of the equilibrium exchange rate InSt.CNY/USD. Table 1 InY InM In(1+r) China 3 6.XX 0.06 USA 3 5.XX 0.06 4) [10 marks] Exchange Rates: Asset Markets. We are examining the monetary model where prices are inflexible in the short-run but flexible in the long run. This question considers the relationship between the Chinese yuan (CNY) and the U.S. dollar (USD). The exchange rate is in yuan per dollar, CNY/USD. At time t=0 the demand for real money balances in both the U.S.A. and China is now given by: In- -= 2-6i + lny P Where i = ln (1 + i) is the log nominal interest rate. Assume that the money supply M and real income Y in China and the U.S. have been stable for a very long time, with zero growth rates and zero expected growth rates. For the values of Y, M, and the log world real interest rate in Table 1 below (where XX equals the last two digits of your student number), calculate: a) [2 marks] The nominal interest rate in China and the U.S.A. (in log terms) if Real Interest Parity holds. b) [4 marks] The equilibrium natural log price levels InP in China and the U.S.A.; c) [2 marks] The equilibrium natural log real money balances in in China and the U.S.A.; d) [2 marks] The log of the equilibrium exchange rate InSt.CNY/USD. Table 1 InY InM In(1+r) China 3 6.XX 0.06 USA 3 5.XX 0.06