Consider two economies, Home and Foreign. The DC/FC exchange rate…

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Question Answered step-by-step Consider two economies, Home and Foreign. The DC/FC exchange rate… Consider two economies, Home andForeign. The DC/FC exchange rate(EDC/FC) is determined by the assetapproach to the exchange rate. Home: Realmoney demand: Money supply: Foreign:Real money demand:Consider two economies, Home andForeign. The DC/FC exchange rate(EDC/FC) is determined by the assetapproach to the exchange rate.Home: Real money demand: Money supply:Foreign: Real money demand: Moneysupply:L(R. Y) = 0.4Y – 2500RMS = 15000L*(R*, Y*) = 0.25Y* – 2000R* MS* = 13500Initially, both Home and Foreign are in theirrespective long-run equilibrium. The full-employment level of output in Home is10000, which is 3000 units less than that ofForeign. The long-run (nominal) interest ratein Home and Foreian are 10% and 12 5% in Home and Foreign are 10% and 12.5%respectively.Note: Interest rates are expressed indecimal points (i.e., if R = 0.1, then R = 10%).Keep your answer in 4 decimal points ifneeded. Be sure to show your work.a) What are the initial long-run equilibriumdomestic and foreign price levels if themarket expects 1.5 DC will exchange 1 FC?Find the long-run exchange rate. (4 points)Now, suppose there is a breakthrough in thepayment technology in Foreign such thatthe foreign money demand changespermanently toL* (R* Y*) = 0.24Y* – 2000R*Also, any permanent change will cause theexpected DC/FC exchange rate to changeby 0.225 DC per FC.b) Find the short-run equilibrium foreigninterest rate and the DC/FC exchange ratein the short run. (4 points) c) Find the new long-run equilibrium DC/FCexchange rate and foreign real moneybalance. (4 points)d) If the central bank of Home finds thechange in the short-run exchange rate inpart (b) undesirable and wants to keep it atthe initial long-run level, can they to achievethis goal? Yes/No, explain. (8 points)If yes, find the level of domestic MS that willachieve this goal.If the answer is no and the central bank ofHome wants to bring the exchange rate asclose to the initial long-run level as possible,find the level of money supply that theyshould set. What will be the DC/FCexchange rate that is consistent with thatlevel of money supply?Note: You can assume the change indomestic money supply as a temporary one. Business Economics Macroeconomics INAF 6820 Share QuestionEmailCopy link Comments (0)