Assume quantity theory of money holds

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Assume quantity theory of money holds with constant K and Kf. Suppose Mexico wants to stabilize the exchange rate of its currency with US dollar (dollars/peso).

(1) If US is running a 5% inflation rate solely due to the increase of money supply, what is the inflation rate Mexico should run? Explain your answer.

(2) If Mexico has a real GDP growth rate of 6%, what is the money supply policy Mexico should follow? Explain your answer. (Hint, US money supply grows at 5%)

Reference no: EM13774317

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