Answers
output growth rate in US is = 2%
money demand L = constant
money supply growth rate = 4%
output growth rate in china = 5%
money supply growth = 9%
a. inflation = 9-5 = 4%
growth rate of dollar china exchange rate = (4-2)/2*100
= 1*100%
= 100%
b.
it fixes inflation rate equal to inflation rate in US, that is 2%.
Money supply growth rate in China = 5 + 2 = 7%
c.
Growth rate of output + growth rate of price level = growth rate of Money stock + growth rate of velocity of money
2% + Rate of inflation = (4% + 1%) + 0%
Rate of inflation = 5% - 2%
= 3%
Hence, inflation in the economy is moving at 3 percent annually.
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