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Example 4.2 Suppose that the (gross) rate of return on fiat money in the United States (country a ) is 2.0 and that of Canada

Example 4.2 Suppose that the (gross) rate of return on fiat money in the United States (country a ) is 2.0 and that of Canada (country b ) is 1.0. The (gross) growth rate of the Canadian population ( n b ) is 1.2. Foreign exchange controls are in effect.

a. What is the time path of the exchange rate ( et+1 / et )?

b. Suppose that Canada wishes to maintain a fixed exchange rate with the United States.To accomplish this goal Canada must set its gross rate of fiat money creation ( zb ) to what value?

Need explanation. And No hand Written.

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