Expected rate of change in the nominal exchange

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Reference no: EM133052799

Long run exchange rates$/POUND My Answer: (USD is home, pound is foreign)

Use the long run money market model. If money supply is growing at 4% in the United States and 5% in the United Kingdom, while real GDP is rising at 2% in the United States, and at 1% in the United Kingdom, what is the expected rate of change in the nominal exchange rate E? State which currency is appreciating/depreciating clearly.

Inflation in US: Money growth - income growth = 4 - 2 = 2%

Inflation in UK: Money growth - income growth = 5 - 1 = 3%

Expected rate of change: 2 - 3 = -1%

Reference no: EM133052799

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