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Using the general model of the monetary approach to exchange rate determination, consider the following scenario: Assume that real income grows at a rate of 3% in both the home country and the foreign country and assume the money supply grows at a rate of 7% in both countries. Suppose the world real interest rate is 1%.

a) Now suppose the money growth rate decreases from 7% to 5% in the home country. What will happen to the home money supply, the home price level/inflation, the home real money balances, the nominal interest rates, and the exchange rate?

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Business Economics, Economics

Category:- Business Economics
Reference No.:- M91720672

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