ECO202Y5 Midterm: Term Test 4 Solutions.pdf
Document Summary
Row 6, box [1] [2]: domestic inflation is. 7%, so domestic price expectations will increase by 7% each period. Box [1] [2]: pe t(1 + ) = pe t+1. Row 7, box [3] [5]: since we know the economy remains at the medium run equilibrium, p must equal pe. Row 9, box [6] [7]: % = % e + % p* To keep the real exchange rate constant: % = 0 = % e + 10 7 or % e. Box [6] [7]: et(1 + (-0. 03)) = et+1. Box [6] = 8(1 0. 03) = 7. 8. Box [7] = 7. 8(1 0. 03) = 7. 6. Row 10, box [8] [10]: use the equation = ep*/p to substitute in values e, p* and p. Row 11: investors know that next year, the domestic price level will rise by 7% and the foreign price level by.
