QUESTION 16

For the following question assume that the Fed is not committed to price level stability. The exchange rate is 1.0. The interest rate starts at 0.15 and the Fed increases the money supply by twenty percent reducing the interest rate to 0.01. Assume that the economy completely adjusts after two years. Starting a day after the interest rate decrease, what is the change in the exchange rate over the next two years.

0.20

0.00

-0.14

0.10

QUESTION 17

What is the change in the price level over the next two years.

0.20

0.00

0.10

-0.10

QUESTION 18

Assume that absolute purchasing power parity holds between the US and the UK. But it only holds over the long run. Assume that the same basket of goods costs 100 dollars in the US and 200 pounds in the UK. The long run value of the US exchange rate is.

0.5

1.0

1.5

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