can you tell me how to find answer step by step. Consider two countries, home co

Question

can you tell me how to find answer step by step.

Consider two countries, home country a and foreign country b, and each looks like a standard OLG economy. Both countries have foreign currency controls. Country a's gross money growth rate 2 is equal to h rate 2b is equal 1.05, gross population growth rate n is equal to 1.1025 Country b's gross money growth rate to 1.0625, and its gross population growth rate n is equal to 1.02. is equal 1 What is the rate of return on money in country a and country b, respectively? 2 How will the exchange rate between these two countries evolve over time? 3 If country a wants to fix the exchange rate with country b, what gross money growth rate it should adopt?

Explanation / Answer

1. Rate of return on money in country a=1.05/1.1025=0.95

Rate of return for country b=1.0625/1.02=1.04

2. Exchange rate between this two countries =1.04/0.95=1.09

3. Say X is the additional growth rate for a for which rate of return on money for a becomes equal to 1.04

So, (X+1.05)/1.1025=1.04; or, X=0.09

Hence total growth rate=1.05+0.09=1.14

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