Lecture 1 - EC 60: Lecture 14 Exchange Rates in the Long...

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Unformatted text preview: EC 60: Lecture 14 Exchange Rates in the Long Run What we have done so far. Open interest parity condition Money market equilibrium Remember this slide? I ncrease in the Money Supply 1 2: An increase M lowers R and raises the expected future spot rate. 2 4: Over time, P rises, real M falls and E falls. E overshoots its long run value. E 2 M/P R L (R $ ,Y U S ) E R $ E 1 1 1 2 2 3 4 Permanent increase in the US Money Supply Temporarily raises the real supply of money Temporarily lowers the interest rate Permanently increases the price level Permanently depreciates the current I n the transition from the short run to the long run, the exchange rate overshoots its long run equilibrium value. Temporary increase in the money supply I f the increase in the money supply is temporary then there is no expectation that prices will rise in the future. Also, there is no expectation that the dollar will permanently depreciate....
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This note was uploaded on 04/29/2009 for the course ECONOMICS 60 taught by Professor D.brown during the Spring '09 term at Tufts.

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Lecture 1 - EC 60: Lecture 14 Exchange Rates in the Long...

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