ACT245H1 Study Guide - Exchange Rate, Real Interest Rate, Nominal Interest Rate
3 Jun 2014
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To be handed directly to your gsi: suppose that on january 1, the dollar exchange rate with the yen is 1/120 $/y. Over the year, the japanese inflation rate is 5%, and the us inflation rate is 10%. What if japanese inflation were 10% and the. Explain why your answer changes: in the short run model with sticky prices, a permanent reduction in the money supply raises the nominal interest rate and appreciates the currency. When the change is caused by a rise in expected inflation, the currency depreciates: productivity growth has slowed in the united states relative to other countries. This has implications for the real exchange rate as well as for the long-run nominal exchange rate. (hint: the effect of a change in productivity is analogous to the discussion in. Typically, though not always, long-term interest rates are above short-term rates, as in the preceding examples from 2004.
