Econ 4810 Fall 2020 HQ 5 Due Friday, October 2, 2020,5 PM Christian Imboden Georgia State University Two problems. If you assemble your homework so that the photos are in the same order as the questions, are in one .pdf file, and your name is on every page, you will get another 5%. The first question is based on the latter half of chapter 3 and the 2nd question is based on the beginning of chapter 4. 1a) Suppose that the real GDP growth rates for the US and Canada are both zero, and that the nominal money supply growth rates for the US and Canada are both 2%, making inflation 2% in both countries. If the world REAL interest rate is 3%, solve for the US nominal interest rate is and the Canadian nominal interest rate iCAN. [10] 1b) In both countries, the liquidity preference L is flexible and is a function of the interest rate on deposits in that country. In the US, nominal money supply is growing at 2% (as previously stated), when suddenly it decreases to 1% at time T, lowering the rate of inflation to 1%. On the following axes, show what happens to the US nominal money supply M, real money M/P, price level P, nominal interest rate is, money market (this is the interaction between demand L(is) which is drawn for you and the vertical supply curves, which you will draw with an arrow showing the shift), and the exchange rate Es/CAD. Be careful: you will be able to find the new interest rate using the Fisher effect, and initially you should have the rate of depreciation before time T equal to zero, otherwise, this is kind of like the example in the book (page 97) except that the nominal money supply growth rate is decreasing instead of increasing (but still staying positive), and that example on page 97 does not show the money market (but it discusses what is happening in the money market). [50] M is t is M/P L(is)YUS M/P ES/CAD t 2a) Fill in the following table of short run information about the foreign exchange market for US dollars to British pounds. Table 4-1 on page 114 will be a good model to follow. The interest rate on dollar deposits is=6% while the interest rate on pound deposits ie=2%. The expected future exchange rate E@s/e=2.08. Use at least 4 decimal places when you have repeating decimals. [35] is (decimal) i (decimal) Spot rate Es/e today Expected future exchange rate Expected dollar return on pound deposits Expected depreciation of the dollar against the pound, a.k.a. expected appreciation of the pound against the dollar 0.0612 .06 1.96 2.00 2.04 2.08 .02 2.08 2.12 0.0011 2b) At what spot rate will the FX market be in equilibrium in the short run? [5] Econ 4810 Fall 2020 HQ 5 Due Friday, October 2, 2020,5 PM Christian Imboden Georgia State University Two problems. If you assemble your homework so that the photos are in the same order as the questions, are in one .pdf file, and your name is on every page, you will get another 5%. The first question is based on the latter half of chapter 3 and the 2nd question is based on the beginning of chapter 4. 1a) Suppose that the real GDP growth rates for the US and Canada are both zero, and that the nominal money supply growth rates for the US and Canada are both 2%, making inflation 2% in both countries. If the world REAL interest rate is 3%, solve for the US nominal interest rate is and the Canadian nominal interest rate iCAN. [10] 1b) In both countries, the liquidity preference L is flexible and is a function of the interest rate on deposits in that country. In the US, nominal money supply is growing at 2% (as previously stated), when suddenly it decreases to 1% at time T, lowering the rate of inflation to 1%. On the following axes, show what happens to the US nominal money supply M, real money M/P, price level P, nominal interest rate is, money market (this is the interaction between demand L(is) which is drawn for you and the vertical supply curves, which you will draw with an arrow showing the shift), and the exchange rate Es/CAD. Be careful: you will be able to find the new interest rate using the Fisher effect, and initially you should have the rate of depreciation before time T equal to zero, otherwise, this is kind of like the example in the book (page 97) except that the nominal money supply growth rate is decreasing instead of increasing (but still staying positive), and that example on page 97 does not show the money market (but it discusses what is happening in the money market). [50] M is t is M/P L(is)YUS M/P ES/CAD t 2a) Fill in the following table of short run information about the foreign exchange market for US dollars to British pounds. Table 4-1 on page 114 will be a good model to follow. The interest rate on dollar deposits is=6% while the interest rate on pound deposits ie=2%. The expected future exchange rate E@s/e=2.08. Use at least 4 decimal places when you have repeating decimals. [35] is (decimal) i (decimal) Spot rate Es/e today Expected future exchange rate Expected dollar return on pound deposits Expected depreciation of the dollar against the pound, a.k.a. expected appreciation of the pound against the dollar 0.0612 .06 1.96 2.00 2.04 2.08 .02 2.08 2.12 0.0011 2b) At what spot rate will the FX market be in equilibrium in the short run? [5]