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Author Question: Explain the purpose of the following figure. What will be an ideal ... (Read 119 times)

karateprodigy

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on: Jun 30, 2018
Explain the purpose of the following figure.
 
  What will be an ideal response?

Question 2

Present and explain the Fundamental Equation of the Monetary Approach.
 
  What will be an ideal response?


Anna

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Reply #1 on: Jun 30, 2018
Answer to Question 1

To show that spot and forward exchange rates are in general close to each other.

Answer to Question 2

Assume = PUS/PE and that domestic price levels depend on domestic money demands and supplies:
PUS = MUSS/L(R, YUS)
PE = MES/L( , YE)
Therefore, the exchange rate is fully determined in the long run by the relative supplies of those monies and the relative real demands for them. Shifts in interest rates and output levels affect the exchange rate only through their influence on money demand.


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