Question 2. The Gold Standard was in place from 1880 to 1914. Answer the following questions using the model and the assumptions developed in class. a. Suppose nominal interest rates are five percent for all countries on the gold standard. Income for countries on the gold standard increases by two percent. What are real interest rates for countries on the gold standard. For the next questions, you should assume that the world gold supply increases by six percent. b. Suppose that inflation in the countries on the Gold Standard is four percent What is the change in real income for countries on the gold standard? c. Suppose that new countries join the gold standard the real income of all countries on the gold standard increases by twenty percent. What is inflation? d. Suppose that countries leave the gold standard reducing the income of countries on the gold standard by ten percent. What is inflation? I Question 3. Guatemala is a small country in Central America. It has a fixed exchange rate with the U.S. The Monetary base for Guatemala is 100. Domestic Credit is 40. The interest rate in Guatemala is 0.05 while the interest rate in the US is 0.05. There is an open capital market and relative PPP holds at all times. Using the model and the assumptions developed in class, answer the following questions. a. What is the backing ratio for Guatemala? b. By how much does Guatemala need to increase its foreign reserves to enable it to form a currency board? Suppose Guatemala increases domestic credit to 60. What is the change in the monetary base? d. If inflation in the US is two percent what is the real interest rate in Guatemala? Question 2. The Gold Standard was in place from 1880 to 1914. Answer the following questions using the model and the assumptions developed in class. a. Suppose nominal interest rates are five percent for all countries on the gold standard. Income for countries on the gold standard increases by two percent. What are real interest rates for countries on the gold standard. For the next questions, you should assume that the world gold supply increases by six percent. b. Suppose that inflation in the countries on the Gold Standard is four percent What is the change in real income for countries on the gold standard? c. Suppose that new countries join the gold standard the real income of all countries on the gold standard increases by twenty percent. What is inflation? d. Suppose that countries leave the gold standard reducing the income of countries on the gold standard by ten percent. What is inflation? I Question 3. Guatemala is a small country in Central America. It has a fixed exchange rate with the U.S. The Monetary base for Guatemala is 100. Domestic Credit is 40. The interest rate in Guatemala is 0.05 while the interest rate in the US is 0.05. There is an open capital market and relative PPP holds at all times. Using the model and the assumptions developed in class, answer the following questions. a. What is the backing ratio for Guatemala? b. By how much does Guatemala need to increase its foreign reserves to enable it to form a currency board? Suppose Guatemala increases domestic credit to 60. What is the change in the monetary base? d. If inflation in the US is two percent what is the real interest rate in Guatemala
