Problem 1. (20 Points) Suppose that the price of a national output basket is ¥200 in Japan, and $250 in U.S. a) What is

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Problem 1 20 Points Suppose That The Price Of A National Output Basket Is 200 In Japan And 250 In U S A What Is 1 (28.85 KiB) Viewed 19 times

Problem 1 20 Points Suppose That The Price Of A National Output Basket Is 200 In Japan And 250 In U S A What Is 2 (18.45 KiB) Viewed 19 times

Problem 1. (20 Points) Suppose that the price of a national output basket is ¥200 in Japan, and $250 in U.S. a) What is the spot exchange rate Eysbased on absolute PPP? Show your calculations. (10 pts) b) What is the spot exchange rate Egybased on absolute PPP? Show your calculations. (10 pts) Problem 2. (30 Points) Suppose that the annual inflation rate of 2022 is expected to be 3.5% in U.S. and 2.0% in Japan. a) What is the expected percent change of Ev/s in 2022 based on relative PPP? (10 pts) b) What is the expected percent change of Exy in 2022 based on relative PPP? (10 pts) c) Which currency is expected to depreciate in 2022? To what extent? (10 pts) Problem 3. (50 Points) Suppose that the US nominal money supply is $150 billion, the U.K. nominal money supply is £100 billion, the US real GDP is $1,000 billion, and the UK real GDP is £450 billion. Each country's real money demand is determined by L(R,Y)=R-005-z where R, the annual nominal interest rate, is 4.5% in the U.S. and 3.0% in UK. a) Compute the equilibrium spot exchange rate Es, using the monetary approach. (30 pts)
Problem 3. (50 Points) Suppose that the US nominal money supply is $150 billion, the U.K. nominal money supply is £100 billion, the US real GDP is $1,000 billion, and the UK real GDP is £450 billion. Each country's real money demand is determined by L(R.Y)=R-00-02 where R, the annual nominal interest rate, is 4.5% in the U.S. and 3.0% in UK. a) Compute the equilibrium spot exchange rate Es using the monetary approach. (30 pts) b) What is the spot exchange rate E that is expected to prevail one year from now? Hint: the Fisher equation and relative PPP are needed to find the answer] (20 pts)