Uruguay is a small economy in Latin America.You should assume that it has a floating exchange rate.Assume also that the demand for money is given by

M = LPY

Where M is money, P is the price level, Y is real income and L is constant.

a.Assume that income for Uruguay falls by five percent and the money supply grows at the rate of five percent.Assume that U.S inflation is zero.What is inflation for Uruguay?

b.What is the change in the Uruguayan exchange rate versus the US if a. holds?Assume that US is the home country.

c.Assume that the U.S interest rate is two percent.What is the interest rate in the Uruguay?

d.What is the real interest rate in Uruguay?

e.What is the real interest rate in the U.S?