Suppose the quantity theory of money and the PPP theory of exchange rates describe an economy. If the rate of growth of the money supply = 20%, real GDP growth = 3%, foreign inflation is 2%, and the nominal exchange rate is fixed, a. What is the definition of the real exchange rate? Use words and an equation. b. What is the domestic inflation rate? c. What happens to the nominal exchange rate and to the real exchange rate? d. What will happen to the country's imports and exports and its trade balance? e. Answer (b), (c), and (d) if the country has a floating exchange rate.
