Economics 3. Consider the following long run monetary model of exchange rates: PUKI = Ec/s.+ Pus,t (5) MUK,t = exp(-miUk,t ) YUK,!, Must = exp(-nius) Yus,t (6) PUK,t Pus,t iUKI = ius + el/s,t+ 1 - ef/$,t (7) 1 ef/s,t mUK,t - must + yus,t - yUK,t) + n ec/s,t+1 ( 8 ) 1 + n 1 + n where MUK,t, Must, Yus,t, YUK, are given, time is discrete and runs from period t = 0 onwards, and n, ius > 0 are known constants. (a) Suppose must = yus,t = yuk,t = 0 for all t and mukt = mukt-1+ 6 for all t > 0, with o > 0 and muk,0 = m > 0. Solve for the fundamental exchange rate. Is there a solution for all 5 > 0? [10%] (b) Find the values of es/s, mux and ik in periods 0 to 3 when m = 1, 6 = 0.50, n = 2, and ius = 0.1. Comment on the results. [10%]