Consider two countries, Toluca Lake (TL) and Shepherd's Glen (SG), in short run equilibrium with price stickiness and capital mobility. The velocity of money is given vTL(iTL)== ( iT L 0.0200) and SG(iSG) = ( iSG + 0.0025). The spot rate is ETL/SG = 1.20. The following provides information about current economic conditions in each location:

Toluca Lake

Real Ouput (YTL):10

Price Level (PTL):1.20

Money Supply: X

Interest Rate (iTL):6%

Shepherds Glen

Real Output (YSG):5

Price Level (PSG):1.50

Money supply: Y

Interest rate (iSG):Z

Suppose that whether TL$ is expected to depreciate is not given and let Y=-(5/4)X exchange SG$1 for TL$F(TL/SG) tomorrow.

Question: A permanent increase in the growth rate of Money supply for Toluca lake of 5% will

a) cause iTL to fall then rise and ETL/SG to rise then fall

B Will cause iT L to fall then rise, and ETL/SG to fall then rise

C Will cause iT L to rise then fall, and ETL/SG to rise then fall

D Will cause iTL to rise then fall, and ET L/SG to fall then rise