1. Suppose there is a reduction in aggregate real money demand, that is, a negative shift...
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1. Suppose there is a reduction in aggregate real money demand, that is, a negative shift in the aggregate real money demand function. Trace the short-run and long-run effects on the exchange rate, interest rate, and price level. 2.What is the short-run effect on the exchange rate of an increase in domestic real GNP, given expectations about future exchange rates? 3.In our discussion of short-run exchange rate overshooting, we assumed that real out put was given. Assume instead that an increase in the money supply raises real output in the short run (an assumption that will be justified in Chapter 17). How does this affect the extent to which the exchange rate overshoots when the money supply first increases? Is it likely that the exchange rate undershoots? (Hint: Allow the aggregate real money demand schedule to shift in response to the increase in output.) 1. Suppose there is a reduction in aggregate real money demand, that is, a negative shift in the aggregate real money demand function. Trace the short-run and long-run effects on the exchange rate, interest rate, and price level. 2.What is the short-run effect on the exchange rate of an increase in domestic real GNP, given expectations about future exchange rates? 3.In our discussion of short-run exchange rate overshooting, we assumed that real out put was given. Assume instead that an increase in the money supply raises real output in the short run (an assumption that will be justified in Chapter 17). How does this affect the extent to which the exchange rate overshoots when the money supply first increases? Is it likely that the exchange rate undershoots? (Hint: Allow the aggregate real money demand schedule to shift in response to the increase in output.)
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1 The reduction in the aggregate real money demand will cause the money demand schedule to shift to the left The effect of this will be seen in the de... View the full answer
Related Book For
International Economics Theory and Policy
ISBN: 978-0273754206
9th Edition
Authors: Paul R. Krugman, Maurice Obstfeld, Marc J. Melitz
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