2 MasConsider two countries, A and B. In 2020, Country A experienced a real output growth of 3% per year, whereas Country B had a real output growth of 4% per year. Suppose thecentral bank of Country A allowed the money supply to grow by 6% each year, and the central bank of Country B chose to maintain the money growth rate of 6% per year. Theannual nominal interest rate in country A is 6%. Use the general monetary model (where L depends on the interest rate of the country) and the purchasing power parity. TreatCountry A as the home country and Country B as the foreign countryNow, suppose that the real output growth rate in country A falls to 1% per year permanently today (at time T). Then• At time T, the real money balance in country A, M(A)/P(A), jumps up0 After that, the real money balance grows faster than before1At time T, the price level in country A, P(A), jumps downAfter that, the price level grows slower than before•#After that, the exchange rateAt time T, the exchange rate of country A's currency against country B's currency, E(A/B), jumps downgrows slower than before#

*Answer: Real output growth represents output growth in respect of inflation and is a true…

thome country and Country B as the foreign country at the real output growth rate in country A falls to 1% per year permanently today (at time T). Then weal money balance in country A, M(A)/P(A) jumps up rice level in country A, P(A), jumps down change rate of country A's currency against country B's currency, E(A/B), jumps down than before After that, the real money balance grows After that, the price level grows slower than before After that, th

thome country and Country B as the foreign country at the real output growth rate in country A falls to 1% per year permanently today (at time T). Then weal money balance in country A, M(A)/P(A) jumps up rice level in country A, P(A), jumps down change rate of country A's currency against country B's currency, E(A/B), jumps down than before After that, the real money balance grows After that, the price level grows slower than before After that, th

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter15: The Debate Over Monetary And Fiscal Policy

Section: Chapter Questions

Problem 1TY

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