Problem Set 40-1

FORUM

1. Consider the three events listed along the top row of the following Table. Using the FOREX Market, and Money Market models developed in class, indicate the effect of each change, sequentially, on the variables listed in the first column. For example, expansionary monetary policy will cause an increase in the Real US money supply. Therefore a "+" is placed in the first box of the table. Next in sequence, answer how US interest rates will be affected.You do not need to show your work. Note E_$/* represents the dollar/foreign exchange rate. Use the following notation:

+    the variable increases
-    the variable decreases
0    the variable does not change
A    the variable change is ambiguous (i.e. it may rise, it may fall)

	I Expansionary US monetary policy	II Increase in US price level	III Increase in US real GDP
Real US money supply	+
US interest rates
RoR on US assets
Foreign interest rates
RoR on foreign assets
US dollar value
E$/*