Describe the central bank behavior after the shock

Reference no: EM132198958

Question: In a simple monetary model : Real income grows at 3% at Home and Foreign, Money supply grows at 7% at Home and Foreign, There is a decrease in the growth rate in Home, from 3% to 0% (a shock to growth rates)

NOW suppose Home pegs its currency to Foreign:

(a) Write down the relevant monetary model(s) of Exchange Rates. What is the endogenous variable and how do we know its value?

(b) How does your description of the baseline setup (before the shock) change?

(d) Describe what will happen with inflation and the exchange rate after the shock.

(e) Graph the paths of evolution of logged money supply (M), logged real money demand (M/P), logged price level (P) and logged nominal exchange rate (E).

Reference no: EM132198958

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