Exercise Set 7
MONEY AND EXCHANGE RATES

I. Objectives

  1. To obtain equilibrium interest rates
  2. To compute the equilibrium spot rate
  3. To see how money affects the exchange rate in the short run

II. Data

Interest rate calculation

Exchange rate calculation

Click on Gimme Rates! to confirm.

III. Questions

  1. The exogenous variables are as follows: M = 411, P = 10, Y = 1000.    

  2. Write the equation signifying equilibrium in the money market in the U.S.

  3. Compute the U.S. eqbm interest rate.

  4. Write the equation indicating the interest parity condition between the U.S. and U.K. Use the values provided above for r* and Ee.

  5. Solve for the eqbm spot rate (in $/£).

  6. Sketch the eqbm condition in the money market. Indicate the eqbm value of r on the graph.

  7. In each case below, compute the U.S. interest rate and the spot exchange rate, and provide the corresponding sketches:
    1. The Fed increases money supply.
    2. U.S. GDP falls.
    3. U.S. price level rises.

  8. From the preceding, we conclude that the dollar will depreciate against the pound in the short run if:
    1. The Fed [increases / decreases] money supply.
    2. U.S. GDP [rises / falls].
    3. The price level in the U.S. [increases / decreases].
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