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Unformatted text preview: (4) Suppose that the U.S. money supply has been constant, and the U.S. economy has been in the long-run equilibrium. Imagine that the money supply unexpectedly decreases today and is expected to stay at the new level from now on forever. The European economy has been and is expected stay at the long-run equilibrium. The price level does not change today, but is expected to adjust to the long-run equilibrium level in one year. (4.a.) Use the diagrams for the money market and the expected returns for one year ago ( t & 1 ), today ( t ) and one year from now ( t + 1 ) in order to explain the exchange rate overshooting phenomenon. Explain your diagrams and answer whether the dollar appreciates or depreciates. (4.b.) Draw diagrams for the time paths of the U.S. money supply, dollar interest rate, the U.S. price level, and the Dollar/euro exchange rate. 1...
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This note was uploaded on 07/17/2008 for the course ECON 520 taught by Professor Ogaki during the Spring '07 term at Ohio State.
- Spring '07