Effects of a permanent increase in the u.s. money supply, International Economics

Assignment Help:

Q. Explain the effects of a permanent increase in the U.S. money supply in the short run and in the long run. Assume that the U.S. real national income is constant.

A raise in the nominal money supply increases the real money supply and lowering the interest rate in the short run. The money supply enhance is considered to maintain in the future therefore, it will influence the exchange rate expectations. This will make the predictable return on the euro more desirable and therefore the dollar depreciates. In the case of an enduring increase in the U.S. money supply then the dollar depreciates more than under a temporary increase in the money supply.

Currently in the long run prices will increase until the real money balances are the same as prior to the permanent increase in the money supply. Ever since the output level is given the U.S. interest rate which decreased prior to start to increase until it will move back to its original level.

The balance interest rate should be the same as its original long -run value. This raise in the interest rate should cause the dollar to appreciate against the euro after its sharp depreciation as a result of the permanent raise in the money supply. Thus a large depreciation is followed by an appreciation of the dollar. Ultimately the dollar depreciates in proportion to the increase in the price level which in turn enhance by the same proportion as the permanent increase in the money supply. Therefore money is neutral in the sense that it can't affect in the long run real variables for instance investment, output, and so on.


Related Discussions:- Effects of a permanent increase in the u.s. money supply

How and why did europe set up its single currency, Q. How and why d...

Q. How and why did Europe set up its single currency? Answer: The why part of the question is associated to large fluctuations in the exchange rates between the Europe

The law of reciprocal demand, what does the law of reciprocal states about ...

what does the law of reciprocal states about and how does it differ from the theories of smith and ricardo

International monetary system during the post-world war, Q. How did the int...

Q. How did the international monetary system influence macroeconomic policy-making and performance during the post-World War II years during which exchange rates were fixed under t

Trade and costs, how trade lowers the costs of making computer peripherals ...

how trade lowers the costs of making computer peripherals such as mice and keyboards

Present the case for floating exchange rates, Q. Present the case f...

Q. Present the case for floating exchange rates. Answer: 1. Monetary policy autonomy Governments would able to use financial policy to reach internal and extern

Explain why east asian countries have done so well, Q. Explain why East Asi...

Q. Explain why East Asian countries have done so well relative to South American countries. Answer: Generally the reasons are less moral hazard less government debt to forei

Analyze the effects of an increase in the u.s. money supply, By Using the f...

By Using the figure describing both the U.S. money market and The foreign exchange market, analyze the effects of an increase in the U.S. money supply on the dollar or euro exchang

Could relative wages in the two countries become equal, Q. If trade were t...

Q. If trade were to open up between R and P, where could the world terms of trade locate in the figure above (somewhere on the PC/PF axis)? Could relative wages (w/r) in the two c

Opportunity cost, what is the criticism of opportunity cost

what is the criticism of opportunity cost

Discuss the problems that the emu will face, Q. Discuss the problems ...

Q. Discuss the problems that the EMU will face in the coming years. Answer: Europe isn't an optimum currency area so asymmetric economic developments within different cou

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd