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5. Monetary Approach to Exchange Rates (general model). In this question, assume L depends on the interest rate. Consider a world in which the prices
5. Monetary Approach to Exchange Rates (general model). In this question, assume L depends on the interest rate. Consider a world in which the prices of goods are perfectly exible and absolute PPP holds. This world has two countries, the US. and Mexico. The real interest rate is equal to 5% and it is xed on world markets. Suppose the money growth rate is 1% both in the United States and in Mexico. Real GDP is growing at a 1% rate in Mexico and 0.5% in the United States. (1) (1 point). Now suppose that at time T, Mexico's expected GDP growth rates rises to 2%. What is the effect of this on the Mexican nominal interest rate and Mexican peso exchange rate at time T
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