A. basket of goods sold in the Eurozone is priced and weighted as shown in the following table.
|
Country
|
Exchange Rate
|
Money growth
|
Real GDP growth
|
Trade with U.S.
|
|
United States
|
|
4%
|
2.5%
|
-
|
|
Mexico
|
E = .25USD/MXP
|
5%
|
4%
|
30%
|
|
United Kingdom
|
E = 1.5USD/GBP
|
3%
|
3%
|
30%
|
|
France
|
E = 1.2USD/EUR
|
6%
|
15%
|
40%
|
1. If one were to use the simple monetary model to predict the $/Euro exchange rate (L is constant), what would the expected exchange rate be?
2. If one were to use the simple monetary model to predict the $/GBP exchange rate (L is constant), what would the expected exchange rate be?
3. If one were to use the simple monetary model to predict the $/Mexican Peso exchange rate (L is constant), what would the expected exchange rate be?
4. The United States is interested in maintaining a competitive effective exchange rate. The Fed is tasked with making sure that the dollar does not appreciate relative to the currencies of the rest of the world. Given the data, is the effective exchange rate value of the dollar expected to appreciate or depreciate and by how much? Does the Fed have to do anything to achieve its goal and if so what?