This question considers long-run policies in Cameroon. Assume Cameroon's money growth rate is 7% and inflation rate is 5%. Similarly France's money growth rate is 6% and inflation rate is 3%. Suppose that the world real interest rate is 2%.
Use the associated conditions of the long run money market and exchange rate models to answer below questions. Treat Cameroon as the home country. The exchange rate is defined as Central Africa CFA francs per euro, EF/E.
i. Calculate the real income growth rate in each country.
ii. Calculate the nominal interest rate in each country.
iii. Calculate the expected rate of depreciation in CFA francs per euro.
iv. If Cameroon wants to fix the value of CFA franc against the euro.
[2] What money growth rate must the central bank pick to achieve this objective?
[3] What would be the new inflation rate and the nominal interest rate after this policy change?
[3] Suppose France experiences an increase in their inflation rate, which is now 5%. If Cameroon wants to maintain the fixed exchange rate regime, what will happen to its inflation rate?