Question

1. Consider the over-shooting model we studied in class and under PPP with sticky prices. There are two countries, the United States and Venezuela. (a) Use the graph below (or make your own) to set up the initial equilibrium for each country's currency market in period 0. Plot and label the initial curves for (i) the UIP condition, (ii) supply of real money balances, and (iii) the demand for real money balances. Indicate the initial equilibrium in each market. United States E_USD/KRW i_USD M_USD/P_USD^USA South Korea E_KRW/USD i_KRW M_KRW/P_KRW^KOR

          1. Consider the over-shooting model we studied in class and under PPP with sticky prices. There are two countries, the United States and Venezuela.

(a) Use the graph below (or make your own) to set up the initial equilibrium for each country's currency market in period 0. Plot and label the initial curves for (i) the UIP condition, (ii) supply of real money balances, and (iii) the demand for real money balances. Indicate the initial equilibrium in each market.

United States
E_USD/KRW
i_USD
M_USD/P_USD^USA

South Korea
E_KRW/USD
i_KRW
M_KRW/P_KRW^KOR

1. Consider the over-shooting model we studied in class and under PPP with sticky prices. There are two countries, the United States and Venezuela.

(a) Use the graph below (or make your own) to set up the initial equilibrium for each country's currency market in period 0. Plot and label the initial curves for (i) the UIP condition, (ii) supply of real money balances, and (iii) the demand for real money balances. Indicate the initial equilibrium in each market.

United States
EUSD/KRW
iUSD
MUSD/PUSD^USA

South Korea
EKRW/USD
iKRW
MKRW/PKRW^KOR

Added by Kate M.

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