Quick%20Quiz%2011%21 - Quick Quiz 11 Belize is a very small...

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© Hadi Salehi Esfahani Belize is a very small open economy and its central bank is committed to maintain a fixed exchange rate of 2 Belize dollar per 1 US dollar. Assume that the real exchange rate is expected to remain equal to the current real exchange rate under all circumstances. For Belize, international prices and loans are all in US dollars, with risk-free real interest rate of r * = 1% = 0.01. 1. If the nominal interest rate in Belize is i = 16% = 0.16, what is the expected rate of inflation,  e , in the country? 2. If the government of Belize increases its expenditure and  e remains constant, what will happen to the nominal interest rate and money supply in the country? 3. Suppose the people in Belize lose confidence in their currency and come to expect the rate of inflation to rise to 30 percent. What will happen to the nominal interest rate in Belize? 4. In this situation, what will happen to the IS and LM curves and to the money supply in Belize?
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