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Consider two countries, A and B. In 2020, Country A experienced a real output growth of 3% per year, whereas Country B had a real output growth of 4% per year. Suppose the central bank of Country A allowed the money supply to grow by 6% each year, and the central bank of Country B chose to maintain the money growth rate of 6% per year. The annual nominal interest rate in country A is 6% Use the general monetary model (where L depends on the interest rate of the country) and the purchasing power party Treat Country A as the home country and Country B as the foreign country Now suppose that the real output growth rate in country A falls to 1% per year permanently today (at time T). Then • At time T, the real money balance in country A, M(A)/P(A) jumps up After that, the real money balance grows faster than before 1 At time T, the price level in country A, P(A), jumps down After that, the price level grows slower than before # At time T, the exchange rate of country A's currency against country B's currency, E(A/B), jumps down # After that, the exchange rate grows slower than before #

Consider two countries, A and B. In 2020, Country A experienced a real output growth of 3% per year, whereas Country B had a real output growth of 4% per year. Suppose the central bank of Country A allowed the money supply to grow by 6% each year, and the central bank of Country B chose to maintain the money growth rate of 6% per year. The annual nominal interest rate in country A is 6% Use the general monetary model (where L depends on the interest rate of the country) and the purchasing power party Treat Country A as the home country and Country B as the foreign country Now suppose that the real output growth rate in country A falls to 1% per year permanently today (at time T). Then • At time T, the real money balance in country A, M(A)/P(A) jumps up After that, the real money balance grows faster than before 1 At time T, the price level in country A, P(A), jumps down After that, the price level grows slower than before # At time T, the exchange rate of country A's currency against country B's currency, E(A/B), jumps down # After that, the exchange rate grows slower than before #

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Mas Consider two countries, A and B. In 2020, Country A experienced a real output growth of 3% per year, whereas Country B had a real output growth of 4% per year. Suppose the central bank of Country A allowed the money supply to grow by 6% each year, and the central bank of Country B chose to maintain the money growth rate of 6% per year. The annual nominal interest rate in country A is 6%. Use the general monetary model (where L depends on the interest rate of the country) and the purchasing power parity. Treat Country A as the home country and Country B as the foreign country Now, suppose that the real output growth rate in country A falls to 1% per year permanently today (at time T). Then • At time T, the real money balance in country A, M(A)/P(A), jumps up 0 After that, the real money balance grows faster than before 1 At time T, the price level in country A, P(A), jumps down After that, the price level grows slower than before • # After that, the exchange rate At time T, the exchange rate of country A's currency against country B's currency, E(A/B), jumps down grows slower than before #
Transcribed Image Text:Mas Consider two countries, A and B. In 2020, Country A experienced a real output growth of 3% per year, whereas Country B had a real output growth of 4% per year. Suppose the central bank of Country A allowed the money supply to grow by 6% each year, and the central bank of Country B chose to maintain the money growth rate of 6% per year. The annual nominal interest rate in country A is 6%. Use the general monetary model (where L depends on the interest rate of the country) and the purchasing power parity. Treat Country A as the home country and Country B as the foreign country Now, suppose that the real output growth rate in country A falls to 1% per year permanently today (at time T). Then • At time T, the real money balance in country A, M(A)/P(A), jumps up 0 After that, the real money balance grows faster than before 1 At time T, the price level in country A, P(A), jumps down After that, the price level grows slower than before • # After that, the exchange rate At time T, the exchange rate of country A's currency against country B's currency, E(A/B), jumps down grows slower than before #
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