Name: Nguyen Thi Van Anh

Student ID: HS173160

ECON 121: MACROECONOMICS PRINCIPLES

INDIVIDUAL ASSIGNMENT

Deadline: 23:59 Monday, Oct 17th, 2022. Submissions accepted only via Edunext.

1. During 2011 the inflation rate in Brazil was about 6.6% while in the U.S. it was about 3.3%. At the
start of 2011 the nominal exchange rate was about 1.7 Brazilian real per U.S. dollar. (2pts)
If purchasing-power parity holds, about what should the nominal exchange rate have been at the end
of 2011? Show your work
2. Suppose the Fed sells government bonds. Use a graph of the money market to show what this does
to the value of money. Explain what happens. (4pts)
3. Using separate graphs, demonstrate what happens to the money supply, money demand, the value of
money, and the price level if people decide to demand less money at each value of money. (4pts)

1. US inflation rate = 3.3% = 0.033

Brazil inflation rate = 6.6% = 0.066
Nominal Exchange Rate at beginning of year = 1.7
Brazilian real per dollar Nominal Echange Rate at the end of the year = Nominal Exchange Rate
at beginning of year x (1+ Brazil inflation rate)/(1+ US inflation rate)
= 1.7 x (1+0.066)/(1+0.033) = 1.7543 Brazilian real per dollar.
2. According The Fed’s 3 tools, Fed sells government bonds to reduce the money supply, so from
MS2 go down to MS1 will make the value of money increase.
3.

People decide to demand less money at each value of money. Since people want to hold less at each
value of money, it follows that the money demand curve will shift to the left from MD1 to MD2. The
decrease in money demand results in lower value of money and so a higher price level.