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RQ_Solution_%28Ch_14%29 - ECMC61 Chapter 14 Review...

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ECMC61 – Chapter 14 Review Questions Answer Key Question 1: Chapter 14, Problems #4 Given expectations about future exchange rates remain unchanged, when domestic real GNP increases: Households want to consume more goods and services transaction volume Real money demand from L(R, Y 0 ) to L(R, Y 1 ). Money market now clears at a higher interest rate, R to R 1 . Given E e and R* are held constant, the - + E E E * R e curve does not shift. When R , at the initial exchange rate, E 0 E E E * R R e - + Home experiences capital inflows demand for DC DC appreciates. Point B is the equilibrium: DC appreciates to E 1 . E E 0 A E 1 B E E E * R e - + ROR R 0 R 1 L(R, Y 0 ) L(R, Y 1 ) (MS/P) (M/P) 1
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Question 2: Chapter 14, Problems #10 Case 1: A permanent in MS without affecting real output in the short run: When MS from MS 0 to MS 1 , real money supply from 0 0 P MS to 0 1 P MS and R from R 0 to R 1 . Given it is a permanent increase in MS; the domestic price level will increase in the future (money is neutral and in the long run ( 29 Y R, L MS P = ). Domestic goods and services become more expensive, export and the demand for DC fall in the future.
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