Consider a case were the growth rate of the money supply in the US is 3% per year and the growth rate of the money supply in the UK is 5% per year. Real GDP growth in the US is 3% per year while real GDP grows at a rate of 2% in the UK. In addition, the Euros per dollar exchange rate is appreciating at a rate of 5.5% per year. You should assume that the inflation rate is determined by the quantity theory of the price level (and inflation) with constant velocity in each country. Calculate the annual percentage change of the real exchange rate (RER).

Consider a case were the growth rate of the money supply in the US is 3% per year and the growth rate of the money supply in the UK is 5% per year. Real GDP growth in the US is 3% per year while real GDP grows at a rate of 2% in the UK. In addition, the Euros per dollar exchange rate is appreciating at a rate of 5.5% per year. You should assume that the inflation rate is determined by the quantity theory of the price level (and inflation) with constant velocity in each country. Calculate the annual percentage change of the real exchange rate (RER).

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Consider a case were the growth rate of the money supply in the US is 3% per year
and the growth rate of the money supply in the UK is 5% per year. Real GDP growth
in the US is 3% per year while real GDP grows at a rate of 2% in the UK. In addition,
the Euros per dollar exchange rate is appreciating at a rate of 5.5% per year.
You should assume that the inflation rate is determined by the quantity theory of the
price level (and inflation) with constant velocity in each country. Calculate the annual
percentage change of the real exchange rate (RER).
Note: Include a (-) sign if the growth rate is negative.

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