1) The exchange rate (under PPP) between the dollar and the British pound would be 0.5 dollars per British pound if a pair of American jeans costs 50 dollars in New York and 100 Pounds in London.

2) Given P (of US) and Y(of US), an increase in the European money supply causes the euro to depreciate against the dollar, and it creates excess demand for dollars in the U.S. money market.

3) All else equal, a change in the level of the supply of money has no effect on values of real output and the interest rate.

4) Assuming perfect arbitrage all the time and all else equal, an increase in interest rates results in an exchange rate appreciation since the rate of return on domestic currency increases.

5) Suppose Home pegs it currency to Foreign’s currency and both countries allow free movement of capital. Then Home has to increase its money supply temporarily if Home has an unexpected positive technology shock.