Use the money market with the general monetary model, and foreign exchange (FX) market to answer the following questions.

Consider 2 countries, country A (using dollars) and B (using pounds). In Country A, the money supply, M(A), is 200 million dollars, the real income, Y(A), is 200 million, the the price level P(A), is 2 dollars, and the annual nominal interest rate, i(A), is 5 percent. In Country B, the money supply, M(B), is 100 million pounds, the real income, Y(B), is 200 million, the the price level, P(B), is 1 pound, and the annual nominal interest rate, i(B), is 5 percent. These two countries have maintained the long-run levels with the nominal exchange rate E(A/B) of 2.00. Assume that both countries have perfect capital mobility. Note that the uncovered interest parity (UIP) holds all the time and the purchasing power parity (PPP) holds only in the long-run. Assume that the new long-run levels are achieved within 1 year from any permanent changes in the economies.

Now, today at time T, the real income of Country A fell by 3% permanently. With the fall of the real income in Country A, the annual nominal interest rate in Country A fell by 2 percentage points, from 5% to 3% today. Unless otherwise noted, assume that the money supply in Country A, the real income in Country B, and the money supply in Country B, do not change at all. Treat Country A as the home country. In answering the questions use the exchange rate defined as the units of country A's currency per 1 unit of country B's currency, E(A/B). Assume that both countries use the floating exchange rate system in answering questions 7 and 8.

Question 1. Using the exact equation of the uncovered interest parity, calculate the exchange rate, E(A/B), today after the permanent fall of the real income of Country A (two decimal places).