The United State money supply is growing at a rate of 6 percent, and real US...
The United State money supply is growing at a rate of 6 percent, and real US GDP is growing by 0.5 percent. The euro area’s money supply is expanding by 4 percent, and real GDP in the euro area is declining by 3.5 percent. The dollar/euro spot exchange rate is 1.10. Using the simple model of the monetary approach to predict the US dollar/euro exchange rate, what would the expected exchange rate be?
Homework Answers
US money supply is growing at 6%
US real GDP is growing by 0.5%
Euro area money supply is growing by 4%
real GDP in Euro area is declining by 3.5%
dollar/euro spot exchange rate is 1.10, means 1$= 1.1 Euro
expected exchange rate?
(dollar/euro) = (Money supply in US/ Money supply in Euro) * (real GDP of Euro/ real GDP of US)
= (106/104)* (96.5/100.5)
= 0.979
expected exchange rate using the simple model of the monetary approach = (dollar/euro) = 0.979
1 $ = 0.979 euro
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