This question considers long-run policies in Cameroon. Assume Cameroon’s money growth rate is 7% and inflation...

This question considers long-run policies in Cameroon. Assume Cameroon’s money growth rate is 7% and inflation rate is 5%. Similarly, France’s money growth rate is 6% and inflation rate is 3%. Suppose that the world real interest rate is 2%. Use the associated conditions of the long run money market and exchange rate models to answer below questions. Treat Cameroon as the home country. The exchange rate is defined as Central Africa CFA francs per euro, EF/E.

i. What is the real income growth rate in Cameroon?

ii. What is the real income growth rate in France?

iii. What is the nominal interest rate in Cameroon?

iv. What is the nominal interest rate in France?

v. What is the expected rate of change in CFA francs per euro exchange rate?

Suppose that Cameroon wants to fix the value of CFA franc against the euro.

vi. What money growth rate must the central bank pick to achieve this objective?

vii. Suppose France experiences an increase in their inflation rate, which is now 4%. If Cameroon wants to maintain the fixed exchange rate regime, what will happen to its inflation rate?

Expert Solution

Rahul Sunny answered 7 months ago

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