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Short-run and long-run equilibrium analysis

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Reference no: EM133274417

Short-run and Long-run equilibrium analysis using PPP model. The effects of a decrease in the domestic money supply. Suppose the Canadian economy was initially in a long-run equilibrium. Suppose that the Central Bank of Canada decided suddenly to implement a one-time decrease in money supply. 

(a) Using equilibrium equations explain the long-run effects of a decrease in money supply on output, interest rate, price level and exchange rate. Provide the intuition for your answer.

(b) Using equilibrium equations explain how a one-time decrease in money supply today affects agentsíexpectations today regarding future exchange rate? Provide the intuition for your answer.

Reference no: EM133274417

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