Question 3 (20 points) Suppose the DC/FC exchange rate (EDCFC) is determined by the asset approach to the exchange rate. Home Foreign Money demand L(R, Y) = 0.15Y - 5000R L*(R*,Y)=0.2Y* - 4000R* Money supply MS = 75000 MS* = 76800 Note: Interest rates are expressed in decimal forms (.e., if R = 0.05, then R = 5%). Keep your answer to 4 decimal places if needed. = MGEC61 Assignment 1 (Winter 2022) 3 The long-run level of output in Home is 45000, which is 5000 units less than output in Foreign. Both economies have the same (long-run) level of nominal interest rate, which is 10%. a) Find the initial long-run equilibrium level of exchange rate if the initial) expected DC/FC exchange rate is given by the ratio of domestic price level to foreign price level. (6 points) Recently, there are permanent changes in the domestic money market. Domestic money holders increase the fraction of income held in the form of money increases by 2 percentage points. At the same time, the central bank of Home lowers its volume of open market purchases and the level of money supply changes by 4%. When the market revises their expectations, the expected change rate (ES) would change by 0.242DC per FC. (You need to decide the new levels of money supply and expected exchange rate). b) Find the short-run equilibrium levels of interest rate in both countries and the DC/FC exchange rate. (8 points) c) Suppose there is a change in monetary policy such that the central bank of Home wants to keep the short-run exchange rate at 1.5500 via a temporary change in money supply. Can the central bank achieve this goal? Explain. 6 points) Question 3 (20 points) Suppose the DC/FC exchange rate (EDCFC) is determined by the asset approach to the exchange rate. Home Foreign Money demand L(R, Y) = 0.15Y - 5000R L*(R*,Y)=0.2Y* - 4000R* Money supply MS = 75000 MS* = 76800 Note: Interest rates are expressed in decimal forms (.e., if R = 0.05, then R = 5%). Keep your answer to 4 decimal places if needed. = MGEC61 Assignment 1 (Winter 2022) 3 The long-run level of output in Home is 45000, which is 5000 units less than output in Foreign. Both economies have the same (long-run) level of nominal interest rate, which is 10%. a) Find the initial long-run equilibrium level of exchange rate if the initial) expected DC/FC exchange rate is given by the ratio of domestic price level to foreign price level. (6 points) Recently, there are permanent changes in the domestic money market. Domestic money holders increase the fraction of income held in the form of money increases by 2 percentage points. At the same time, the central bank of Home lowers its volume of open market purchases and the level of money supply changes by 4%. When the market revises their expectations, the expected change rate (ES) would change by 0.242DC per FC. (You need to decide the new levels of money supply and expected exchange rate). b) Find the short-run equilibrium levels of interest rate in both countries and the DC/FC exchange rate. (8 points) c) Suppose there is a change in monetary policy such that the central bank of Home wants to keep the short-run exchange rate at 1.5500 via a temporary change in money supply. Can the central bank achieve this goal? Explain. 6 points)