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a) (20 points) Consider an emerging economy with domestic credit (B) growing at 10%.

a) (20 points) Consider an emerging economy with domestic credit (B) growing at 10%. Assuming the first generation crisis model, the myopic case, explain what happens to the money supply, the growth rate of the money supply, the nominal interest rate, the price level and the nominal exchange rate at time T, where time T is defined as the time that the central bank runs out of reserves. Please use the appropriate equations to support your answers.

b) (20 points) Now discuss how your answers would change if we assume the forward looking case rather than the myopic case. Again, please use the appropriate equations to support your answers and make sure you refer to each of the macroeconomic variables in part a.

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