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Question: 1. Use the real exchange rate equation s EPP to explain the following. Suppose P and P are both i...

Question: 1. Use the real exchange rate equation s EPP to explain the following. Suppose P and P are both i...

Question: 1. Use the real exchange rate equation s EPP to explain the following. Suppose P and P are both i...

Show transcribed image text 1. Use the real exchange rate equation s EPP to explain the following. Suppose P and P are both increasing. Now suppose that the dollar, the domestic currency, experiences an 6% nominal depreciation and the real exchange rate depreciates by 4%. a. Which country experiences higher rate of inflation? b. By how much is the inflation higher? 2. Assume that the interest parity condition i, it -(Ettl holds. The domestic interest rate is 5% and the foreign interest rate is 3%. a. Would you expect the domestic currency to appreciate or depreciate? b. By how much? 3. Use the graph provided below to answer the following questions. The individuals and companies are also taking into account the expectations when forming current investment and consumption, but there are no changes in current and future inflation expectations. Current LM interest rate (r) IS Current output (Y a. The economy is initially at equilibrium. The central bank decides to decrease the money supply. It also affects the expectations of the future interest rates in the same direction. What happens to the position of the IS and LM curves? Show on the graph. b. What are the effects on equilibrium interest rate and equilibrium output? Write just one word. increases, decreases or no change? Y (output): i (interest rate):

1. Use the real exchange rate equation s EPP to explain the following. Suppose P and P are both increasing. Now suppose that the dollar, the domestic currency, experiences an 6% nominal depreciation and the real exchange rate depreciates by 4%. a. Which country experiences higher rate of inflation? b. By how much is the inflation higher? 2. Assume that the interest parity condition i, it -(Ettl holds. The domestic interest rate is 5% and the foreign interest rate is 3%. a. Would you expect the domestic currency to appreciate or depreciate? b. By how much? 3. Use the graph provided below to answer the following questions. The individuals and companies are also taking into account the expectations when forming current investment and consumption, but there are no changes in current and future inflation expectations. Current LM interest rate (r) IS Current output (Y a. The economy is initially at equilibrium. The central bank decides to decrease the money supply. It also affects the expectations of the future interest rates in the same direction. What happens to the position of the IS and LM curves? Show on the graph. b. What are the effects on equilibrium interest rate and equilibrium output? Write just one word. increases, decreases or no change? Y (output): i (interest rate):