Question: Suppose that there is a temporary increase in output Y from 1 to 1.1. We focus on the short run equilibrium when prices are unchanged

Suppose that there is a temporary increase in output Y from 1 to 1.1. We focus on the short run equilibrium when prices are unchanged and equal to their initial level (P1 = P0). Because the shock is temporary, the expected exchange rate remains fixed at Ee = 1 . Calculate the short run domestic interest rate, i1, and the short run exchange rate, E1, if money supply remains constant at 10

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