Consider two nations Canada and the Mexico with the following variables:
YCA = 1.21 millions CA . yCA = 855,000 CA ; MCA = 315,000 CA ; YMX= 685,000 Pe . yMX= 549,000 Pe ; MMX = 110,000 Pe.
? Find the value of kCA and kMX ( fraction of nominal income held as money)
? Determine the equilibrium spot exchange rate between the two nations
? Now determine the spot exchange rate if you decrease the Mexican money supply by 10%. What can we conclude?
? Now determine the spot rate if you simultaneously increase the Mexican money supply by 10% and decrease the Canadian Money supply by 5%. What can you conclude?