Quick%20Quiz%207%21 - The money demand curve will shift to...

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© Hadi Salehi Esfahani The price level in the US economy is expected to rise temporarily this year, but the money supply and GDP are expected to remain constant. Assume there is no change in the rest of the world and in the expected economic conditions in the US next year and beyond. How would the rise in the price level affect: 1. The money demand curve in the US this year? 2. The interest rate in the US and the value of the dollar in terms of euro this year? Quick Quiz 7!
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© Hadi Salehi Esfahani Quick Quiz 7 Solution: 1. How would the rise in the price level affect the money demand curve in the US this year?
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Unformatted text preview: The money demand curve will shift to the right this year. 2. How would the rise in the price level affect the interest rate in the US and the value of the dollar in terms of euro this year? . Higher demand for money and constant GDP and money supply imply a higher interest rate in the US this year. Ms = kP Y / i i = k P Y / Ms . Based on the interest parity condition, the dollar should become relatively stronger. [Note that there is no change in the future and the expected exchange rate should not be affected.] (1+ i* ) e = (1 + i ) ee....
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This note was uploaded on 01/27/2012 for the course ECON 509 taught by Professor Villamil during the Fall '08 term at University of Illinois, Urbana Champaign.

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Quick%20Quiz%207%21 - The money demand curve will shift to...

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