Consider two countries, U.S. and Thailand. In 2019, the U.S. experienced an output growth of 2%, whereas Thailand had an output growth of 4.5%. Suppose the U.S. Federal Reserve allowed the money supply to grow by 4.5% each year, whereas the Bank of Thailand chose to maintain relatively high money supply growth of 6% per year. For the following questions, use the simple monetary model. Treat the U.S. as the home country and Thailand as the foreign country.

(a) What is the inflation rate in the U.S.? In Thailand? (5 points)

(b) What is the rate of change in the U.S. dollar relative to the Thai baht? Does the dollar appreciate or depreciate over time? (5 points)

(c) Suppose that the world economy experiences an economic slowdown. In particular, both countries have GDP growth rates of 0.5%. What is the new inflation rate in the U.S.? In Thailand? (5 points)

(d) Using time series diagrams, illustrate how this decline in the output growth rates a⁄ect (i) the money supply in the U.S., MUS; (ii) price level, PUS; (iii) real money balances, MUS=PUS and (iv) E$=baht over time. (Plot each variable on the vertical axis and time on the horizontal axis. Use the space allocated for each variable below. (12 points)

(i) (ii)

(iii) (iv)

(e) Suppose that the U.S. aims to keep the inflation rate at 2% during the economic slowdown. What money growth rate would help achieve this target?