Question

According to the long run money market model, if money supply is growing at 4% in the

United States and 5% in the United Kingdom, while real GDP is rising at 2% in the United States, and at

1% in the United Kingdom, what will happen to the nominal exchange rate between USD and British

pound? What is the rate of expected depreciation?

Answer 1

ANSWER:-

Amount Theory of Money is the adjustment in cash development causes an equivalent change in expansion rate.

• As indicated by the Quantity hypothesis of cash over the long haul when cash supply(M) increment then speed of money(V) remains and constant.P speaks to the value level and Y speak to the genuine GDP.

The condition is given as:

• %age change in M+%age change in V= %age change in P + %age change in Y
• In UK = 5%+0%=%age change in P+1%

Swelling rate =4%

• In US = 4%+0%=%age change in P+2%

Swelling rate=2% (%age change in cost level= Inflation)

• The rate change in the ostensible conversion standard equivalents the rate change in the genuine swapping scale in addition to the:foreign swelling rate short the residential expansion rate.
• Rate change in ostensible conversion scale = Percentage change in genuine swapping scale + (4%,- 2%) .

Consequently the Nominal Exchange rate among US and UK increment by 2%.

• The Difference in the GDP rate and increment in cash supply is higher in joined realm when contrasted with that of the unified states.Therefore there is a net increment in cash supply in the assembled realm when contrasted with that of US and the expansion implies the deterioration of British pound over USD and this implies at first, for 1 USD you get X pounds and this implies ostensible conversion scale increment all things considered.