This preview shows page 1. Sign up to view the full content.
Unformatted text preview: exchange rate determination try to explain exchange rates in terms of relative money supplies and variables that inuence relative money demands (e.g., relative income levels). One potential problem with these theories is that exchange rates are much more volatile than relative money supplies or relative income levels. Briey explain how the concept of exchange rate overshooting can help to explain why exchange rates are so volatile. Illustrate how the economy responds over time to a permanent money supply increase. Explain intuitively why overshooting occurs. 6. Using the DD-AA model, illustrate the short-run and long-run eects of a permanent 20% reduction in the money supply. Assume the economy is initially in long-run equilibrium (i.e., output equals its full employment level). 1...
View Full Document
This note was uploaded on 04/02/2008 for the course ECON 182 taught by Professor Kasa during the Spring '08 term at University of California, Berkeley.
- Spring '08