Consider two countries, A and B. In 1996, Country A experienced slow real output growth (3.0% per year), whereas Country B had robust real output growth (8.0% per year). Suppose the central bank of Country A allowed the money supply to grow by 4.0% each year, whereas the central bank of Country B chose to maintain relatively high money growth of 10.0% per year. For the following questions, use the general monetary model (where L depends on the interest rate of the country) and the purchasing power parity. Treat Country A as the home country and country B as the foreign country. In addition, assume that the bank deposits in Country A pays 3% nominal interest.

Q1. The Annual inflation rate in country A is _%

Q2. The expected depreciation rate (not the appreciation rate) of the currency of Country A against that of Country B, the growth rate of E (A/B) is _% (zero decimal places)

Q3. Suppose the real output growth rate of Country A fell to 0.0% permanently today (at time T), other things equal, then at the time of real output growth change (at time T) the real money balance in country A:

Choose one:

a) jumps up to a higher level

b) jumps down to a lower level

c) does not change

Q4. Suppose the real output growth rate of country A fell to 0.0% permanently today (at time T), other things equal, then at the time of real output growth change (at time T) the exchange rate (country A's currency per 1 unit of country B's currency)

Choose one:

a) jumps up to a higher level

b) jumps down to a lower level

c) does not change

Q5. Suppose the real output growth rate of Country A fell to 0.0% permanently today (at time T), other things equal, then the long-run annual growth rate of the exchange rate (the depreciation rate for country A's currency per 1 unit of country Bs currency):

Choose one:

a) rises by 3 percentage points

b) falls by 3 percentage points

c) does not change

Q6. Suppose the real output growth rate of Country A fell to 0.0% permanently today (at time T), other things equal, then the long-run annual growth rate of the real balance in country A:

Choose one:

a) rises by 3 percentage points

b) falls by 3 percentage points

c) does not change