Exercise Set 7
MONEY AND EXCHANGE RATES
I. Objectives
- To obtain equilibrium interest rates
- To compute the equilibrium spot rate
- To see how money affects the exchange rate in the short run
II. Data
Interest rate calculation
- The equation for real money demand in the U.S. is: L(r,Y) = 2 - 10r + 0.04Y.
- Choose values for: Nominal money supply (M), Price level (P), and GDP (Y).
- Compute the eqbm interest rate. (If you get a value of 0.05, it means r = 5%.)
Exchange rate calculation
- The interest rate in the UK is: r* = 6%.
- The future expected exchange rate is: Ee = $2/£.
- Using the interest rate computed above, obtain the eqbm spot rate.
Click on Gimme Rates! to confirm.