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Q. If the central bank does not purchase foreign assets when output increases but instead holds the money stock constant, can it still keep the exchange rate fixed at E0?
Answer: No this is for the reason that the domestic interest rate would begin to rise above R*. Traders in the foreign exchange market would start to bid up the price of domestic currency in terms of foreign currency. In the deficiency of central bank intervention the exchange rate thus would fall below E0 so as to prevent this appreciation the central bank should sell domestic currency and buy foreign assets thus increasing the money supply and preventing any excess money demand from pushing the home interest rate above R*.
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Discuss the effects of ongoing inflation based on the PPP theory. Answer: Other things equivalent money supply growth at a constant rate eventually results in ongoing price le
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Q. Suppose Russia's inflation rate is 200% over one year, but the inflation rate in Switzerland is only 2%. According to relative PPP, what should happen over the year to the Swis
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