In the context of the monetary approach to the determination of the exchange rate, what is the effect on the price level, interest rate and exchange rate from a permanent contraction in the domestic growth of the money supply? How do your answer modify if we drop the assumption of PPP?

In the context of the monetary approach to the determination of the exchange rate, what is the effect on the price level, interest rate and exchange rate from a permanent contraction in the domestic growth of the money supply? How do your answer modify if we drop the assumption of PPP?

Macroeconomics

13th Edition

ISBN:9781337617390

Author:Roger A. Arnold

Publisher:Roger A. Arnold

Chapter22: International Finance

Section: Chapter Questions

Problem 10QP

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In the context of the monetary approach to the determination of the exchange rate, what is the effect on the price level, interest rate and exchange rate from a permanent contraction in the domestic level of the money supply? How does your previous answer modify if, instead of the level, it is the domestic growth rate of the money supply that contracts permanently? How do your previous answers modify if we drop the assumption of PPP?
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