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Examine effect of a one-time rise in the foreign price level

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Reference no: EM13868831

Use the DD-AA model to examine the effects of a one-time rise in the foreign price level, P*. If the expected future exchange rate Ee falls immediately in proportion to P* (in line with PPP), show that the exchange rate will also appreciate immediately in proportion to
the rise in P*. If the economy is initially in internal and external balance, will its position be disturbed by such a rise in P*?

Reference no: EM13868831

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