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Question 3. The following Table gives information the rate of growth of the money supply and...

Question 3. The following Table gives information the rate of growth of the money supply and real income for the U.S and Europe over the next year.

You should assume that all other determinants of the demand for money are constant.

                                          Real income growth    Money supply growth   

U.S                                     0.05                                         0.10

Europe                               0.02                                         0.04

Given this information.

  1. What is inflation in Europe?

  1. What happens to the U.S exchange rate over the next year?

  1. Suppose that the Federal Reserve wants to reduce U.S inflation to zero. By how much should it increase the money supply?

  1. Suppose the Federal Reserve wants the exchange rate with Europe to be constant. By how much should the Fed increase the U.S money supply.

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Answer #1

What is Inflation in European countries: The Inflation rate is the percentage of price increase or decrease during a particular month or a year The percentage usually indicates the speed at which the price increased or decreased. The Price of consumer goods is falling for the first time since 4 years  in the 19 nation Euro area .

The European Union (EU) is a political and economic type partnership between 28 Member states. The European Union was founded after the second world war.

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