Finance question
wawayu18QUESTION3-TheMonetaryModelII
Assumethatabsolutepurchasingpowerparityholdsinthelong-run,thatthemoneymarketclearsineachcountry,andthatinbothcountriesthedemandforrealbalancesor“liquiditypreference”takestheform
L=a Y– bI
whereYisthelogofrealincome,andIisthenominalinterestrate.Deriveanexpressionforthelogpricelevel,inthehome(US)andforeigncountry,andforthenominalexchangerate intermsofmoneysupplies,outputs,andinterestdifferentials.Analyzeanddescribeinwordstheimp
actfortheexchangerateinthelong-runofeachofthefollowing:
a) AtighteningofUSmonetarypolicy
b) Adeclinein theforeigncountry’snaturaloutputlevel
c) Anincreaseinthedomesticnaturaloutputlevel
andexplainyouranswerscarefully.
10 years ago
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