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7. Assume that output growth in the U.S. is 2%, money demand (L) is constant and money supply growth is 4%. Assume that...

7. Assume that output growth in the U.S. is 2%, money demand (L) is constant and money supply growth is 4%. Assume that output growth in China is 5%, L is constant and money supply growth is 9%. a. Assume that relative PPP and the quantity theory of money holds. What is the growth rate of the dollar-China exchange rate (%∆E$/China)? b. What should money supply growth be in China if China wants to fix its currency to the dollar? c. Suppose L is growing by 1% per year in the U.S. What is the inflation rate in the U.S.?

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(a) Olp growth rate in China - 5% Money supply growth = 9.7 Inflation rate= 99. - St. – 4.%. Growth rate of dollon china exch

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