Example 4.1Suppose that the United States (countrya) and Great Britain (countryb) have foreign currency controls in effect. The demand for money is growing at 10.25 percent in the United States and at 2 percent in Great Britain (net rates) each period. The fiat money supplies in the United States and Britain are growing at 5 and 6.25 percent net rates in each period, respectively.

1. Defining the exchange rate (et) as in the text, what are the units in which the exchange rate is measured, U.S. dollars per British pound or British pounds per U.S. dollar?
2. What is the rate of return on fiat money in the United States? In Great Britain?
3. Inasystemofflexibleexchangerates,whatisthetimepathoftheexchangeratebetween
4. the United States and Great Britain (et+1/et)?
5. SupposetheUnitedStatesdesirestofixtheexchangerate.HowcantheU.S.government
6. set its gross rate of fiat money creationzato accomplish this goal?