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Home money supply increases by 5% today, which lowers the short term interest rate from 6 to 2%. Prices are expected to fully adjust to the shock in a year's time, restoring PPP.
1. What is the expected depreciation rate a year from now? (report the percentage base)
2. What is the depreciation rate required by UIP in the short run?
3. Combining your answers to the two questions above, by how much does the exchange rate have to jump up today? (report percentage base)
Answers: 3
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Home money supply increases by 5% today, which lowers the short term interest ra...
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