ECONOMICS 3400

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{This Quiz can be answered right in the file using WORD, even if there are graphs involved — then sent in via email, or you can place It on CANVAS in the Files section in the Folder named Quiz 6.  But be sure to identify the file with your name either entering in CANVAS or sending via Email.  There are 5 Problems}

1) The general monetary model of exchange rates for Swiss Franc (SFr) relative to Australian dollar (A$) is given by:

ESFr/A$ = PSFr/PA$ = [{MSFr/LSFr(rSFr)YSFr} / {MA$/LA$(rA$)YA$}]

For, ESFr/A$ = exchange rate; PSFr/PA$ = relative prices, MSFr = money supply;

LSFr (rSFr)YSFr = real money demand with LSFr(rSFr) = liquidity as a function of interest rate, rSFr, and YSFr = real income.  Similarly MA$ = money supply, with LA$(rA$)YA$ = real money demand with LA$(rA$) being liquidity as a function of interest rate and YA$ = real income.

Suppose an increase in the growth rate in Swiss money supply, MSFr. That is, the growth rate increases.  What happens to the a) rate of inflation; b) interest rates, rSFr; c) exchange rate, ESFr/A$; d) real money balances (i.e., MSFr/PSFr); and e) liquidity (or the amount of money needed for transactions), L( rSFr)?  Explain.

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