Quiz_8__Key_ - The long run model of exchange rate...

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Quiz 8 Suppose that the long run exchange rate equals $2 per British pound. Suppose that the constant of proportionality in long run money demand is the same in the U.S. as it is in the U.K. Suppose that real U.S. GDP is $14 trillion, real British GDP is £7 trillion, and the British money supply is £3. Use the long run model of exchange rate determination to calculate the U.S. money supply. Show your work.
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Unformatted text preview: The long run model of exchange rate determination can be written as follows: ݁ ൌ ܯ ௎ௌ ௌ ܯ ௎௄ ௌ ݇ ௎௄ ݇ ௎ௌ ܻ ௎௄ ܻ ௎ௌ In the question, you are told that ݇ ௎ௌ ൌ ݇ ௎௄ , so they cancel out of the right hand side of the equation. Substitute for the other known values: 2 ൌ ܯ ௎ௌ ௌ 3 7 14 ⇒ ܯ ௎ௌ ௌ ൌ 12...
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