please do B part in 40 minutes please urgently... I'll give you up thumb definitely 1. Consider the following unified monetary model of the exchange rate where time is discrete and runs from period t = 0 onwards : iUK,t=iUs+e/s.t+1-ef/s,t (1) (2) PUK,t 1 X 1+n Pus n mUK-mUS+yUS-yUK (3) (Po in period t= 0 in periods 1 to T in all later periods PUK,t=PUKt-1+1(pnew -Po) pnew (4) where Po=P>0 is the given initial UK price level. The UK money supply Muk is given and Mus,Yuk,Yus, Pus, n,T are known positive constants. Lowercase versions of variables are natural logarithms (e.g. muk= In(Muk). The home exchange rate We assume Muk is such that the UK interest rate (iuk) is initially equal to the US interest rate. Agents have rational expectations (a) Give a brief economic explanation for equations (1) and (4) [10%] (b) There is a permanent unanticipated increase in UK money supply from M to Mnew in period 0. The new long run price level is given by pnew= Mnew xP, and we assume T=2.Find an analytical M solution for the period 0 spot rate [10%]
