Problem Set 90-1

1. Suppose the US can be described with an AA-DD model. Suppose also that the US fixes its exchange rate to the British pound. Consider changes in the exogenous variables in the left column. Suppose each change occurs ceteris paribus. Indicate the short-run effects (+, - , 0, or A) on domestic GNP, the US interest rate i_$, and the exchange rate exchange rate E_$/£.

 

	GNP	i$/£	E$/£
A. an increase in the US money supply
B. a decrease in domestic taxes
C. an increase in foreign interest rates
D. an increase in the US price level.
E. an devaluation of the US dollar.