What are predictions for the long run of monetary approach, International Economics

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What are the predictions for the long run of the Monetary Approach?

Answer:     Money supplies- Known the equations

                                                         E$/E = PUS/PE

                                   PUS = MSUS/L(R$, YUS) PE = MSE/L(RE, YE)

 

One is able to show that an increase in the U.S money supply MSUS that causes a proportional raise in the U.S price level PUS which in turn causes a proportional increase in E$/€. Therefore a raise in U.S money supply causes a proportional long-run depreciation of the dollar against the euro and vice versa.

 

Interest rates:  An increase in the interest rate R$ lowers U.S money demand L(R$, YUS) thus causing a rise in the U.S price level and a proportional depreciation of the dollar against the euro.

Output levels: A rise in U.S output YUS increases real U.S money demand leading to a fall in the long-run U.S price level and an appreciation of the dollar against the euro.


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