What is the rate of return on fiat money

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Suppose the United States (country a)and Great Britain (country b) have foreign currency controls in effect The demand for money is growing at 10.25 percent in the United States and at 2 percent in Great Britain (net rates) each period. The fiat money supplies in the United States and Britain are growing at 5 and 6.25 percent net rates in each period.

1. Defining the exchange rate (e_t) as in the text, what are the units in which the exchange rate is measured, US. dollar per British pound or British pounds per U.S. dollar?

2. What is the rate of return on fiat money in the United States? In Great Britain?

3. In a system of flexible exchange rates, what is the time path of the exchange rate between the United States and Great Britain (e_t+i/ et)

4. Suppose the United States desires to fix the exchange rate. How can the U.S. government set its gross rate of fiat money creation e to accomplish this goal?

Reference no: EM13768292

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