Reference no: EM132954543

1. The nominal money supply is growing by 5 percent annually in the United States and 10 percent annually in Kenya, while real GDP is rising by 2.5 percent annually in the United States and 5.5 percent annually in Kenya. Using the simple monetary model of exchange-rate determination, please estimate the percentage change, if any, needed in the dollar-shilling (Ksh) exchange rate for it to reach a long-run equilibrium (assuming that the currencies were in equilibrium at the outset). Be sure to include the relevant equation in your answer, and indicate whether the dollar will appreciate, depreciate, or hold its value versus the shilling. (Hint: the percentage is a round number.)

2. Please use the uncovered interest parity approximation to answer the following question:

(a) If the return on euro deposits (i€) is 1%, the expected dollar-euro exchange rate (Ee$/€) is 1.30, and dollar-euro spot rate (E$/€) falls to 1.25, what is the new equilibrium return on dollar deposits (i$)? (Hint 1: convert the percentages into decimals, e.g., 2% = 0.02. Hint 2, the answer to 1a is a round number when expressed as a percentage.)