Question

In the monetary small open economy model, suppose that money supply equals 100. The money demand function takes the form Md=P(0.5Y-400r). The foreign price level P* is 1. The equilibrium output Y is 200 and the world interest rate r* is 0.2.
A) Determine the equilibrium exchange rate.
B) If the country adopts flexible exchange rate regime, what will be percentage change in the equilibrium exchange rate if money supply goes up by 10%?
C) If foreign price rises by 50% what will be the percentage change in the equilibrium exchange rate? In this case we assume that money supply is fixed at 100.
D) If the country wishes to stabilize the exchange rate, what will be the new money supply if foreign price rises by 50%?​

Answer 1

The final account consists of the following accounts: Trading and Profit and Loss Account. Balance Sheet. Profit and Loss Appropriation account.