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The government of a country decides to increase permanently the growth rate of the domestic money supply from it to a +0.05. Assume that prices are flexible. a) Which model studied in class should we use to address this question? List the equations of this model. b) Describe the initial equilibrium of this economy. That is, describe the behavior of the price level, nominal exchange rate and nominal interest rate prior to the change in the growth rate of M c) Explain how this shock affects the equilibrium of the economy. d) Does UIP hold after the increase in the growth rate of M*? Why? Suppose that two countries, A and B, produce coffee. The currency unit used in country A is the peso and the currency unit in country B is the dollar. In country A, coffee sells for 200 pesos per pound. The exchange rate is 25 pesos per dollar, Epeso/dollar = 25. a) If the law of one price holds for coffee, what is the price of coffee in country B, measured in dollars? b) Assume the price of coffee in country B is actually 10 dollars per pound. What is the relative price of coffee in country B versus country A? If trade is costless between these 2 countries, where will coffee traders buy coffee and where will they sell it? How will these transactions affect the price of coffee in countries A and B? c) Assume now that it costs 25 pesos to transport a pound of coffee between countries A and B and that the price of coffee in country B is still 10 dollars per pound. How does your answer to 1.b) change with the introduction of the trade cost? The government of a country decides to increase permanently the growth rate of the domestic money supply from a to + 0.05. Assume that prices are flexible. a) Which model studied in class should we use to address this question? List the equations of this model. b) Describe the initial equilibrium of this economy. That is, describe the behavior of the price level, nominal exchange rate and nominal interest rate prior to the change in the growth rate of M c) Explain how this shock affects the equilibrium of the economy. d) Does VIP hold after the increase in the growth rate of M'? Why? Consider the following short-run model of equilibrium in the foreign exchange market, money market, and goods market: (1) R=R* + EN (2) * = L(R,Y). (3) Y = C(Y T)+I+G+CA(q,Y -T). All variables have the interpretation given in class (in particular, q = p is the country's real exchange rate). Suppose that the government increases temporarily its spending by AG a) Explain how the endogenous variables of this model adjust to the new short-run equilibrium. b) Suppose now that the government combines the temporary increase in government spending with a temporary increase in the money supply (both occurring at the same time). What can you say about the short-run response of output in this case compared to that in 3.a)? c) Explain the intuition behind the difference in the response of output in questions 3.a) and 3.b). d) Suppose now that the goods market equilibrium is given by (3) Y =C(Y -T)+l(R)+G+CA(q.Y-T), instead of equation (3). Investment is now a decreasing function of the interest rate: when the interest rate increases (decreases), investment decreases (in-creases), all else equal. How does this change affect your answer to question 3.a)? The government of a country decides to increase permanently the growth rate of the domestic money supply from it to a +0.05. Assume that prices are flexible. a) Which model studied in class should we use to address this question? List the equations of this model. b) Describe the initial equilibrium of this economy. That is, describe the behavior of the price level, nominal exchange rate and nominal interest rate prior to the change in the growth rate of M c) Explain how this shock affects the equilibrium of the economy. d) Does UIP hold after the increase in the growth rate of M*? Why? Suppose that two countries, A and B, produce coffee. The currency unit used in country A is the peso and the currency unit in country B is the dollar. In country A, coffee sells for 200 pesos per pound. The exchange rate is 25 pesos per dollar, Epeso/dollar = 25. a) If the law of one price holds for coffee, what is the price of coffee in country B, measured in dollars? b) Assume the price of coffee in country B is actually 10 dollars per pound. What is the relative price of coffee in country B versus country A? If trade is costless between these 2 countries, where will coffee traders buy coffee and where will they sell it? How will these transactions affect the price of coffee in countries A and B? c) Assume now that it costs 25 pesos to transport a pound of coffee between countries A and B and that the price of coffee in country B is still 10 dollars per pound. How does your answer to 1.b) change with the introduction of the trade cost? The government of a country decides to increase permanently the growth rate of the domestic money supply from a to + 0.05. Assume that prices are flexible. a) Which model studied in class should we use to address this question? List the equations of this model. b) Describe the initial equilibrium of this economy. That is, describe the behavior of the price level, nominal exchange rate and nominal interest rate prior to the change in the growth rate of M c) Explain how this shock affects the equilibrium of the economy. d) Does VIP hold after the increase in the growth rate of M'? Why? Consider the following short-run model of equilibrium in the foreign exchange market, money market, and goods market: (1) R=R* + EN (2) * = L(R,Y). (3) Y = C(Y T)+I+G+CA(q,Y -T). All variables have the interpretation given in class (in particular, q = p is the country's real exchange rate). Suppose that the government increases temporarily its spending by AG a) Explain how the endogenous variables of this model adjust to the new short-run equilibrium. b) Suppose now that the government combines the temporary increase in government spending with a temporary increase in the money supply (both occurring at the same time). What can you say about the short-run response of output in this case compared to that in 3.a)? c) Explain the intuition behind the difference in the response of output in questions 3.a) and 3.b). d) Suppose now that the goods market equilibrium is given by (3) Y =C(Y -T)+l(R)+G+CA(q.Y-T), instead of equation (3). Investment is now a decreasing function of the interest rate: when the interest rate increases (decreases), investment decreases (in-creases), all else equal. How does this change affect your answer to question 3.a)