Money, Interest Rates, And Exchange Rates - The Money Supply and the Exchange Rate in the Long Run

5 important questions on Money, Interest Rates, And Exchange Rates - The Money Supply and the Exchange Rate in the Long Run

An economy is in the long-run equilibrium when,

It is the position it would eventually reach if no new economic shocks occurred during the adjustment to full employment. Wages and prices have had enough time to adjust to their market-clearing levels.

The long-run equilibrium price level

P=Ms/L(R,Y). The value of p that satisfies this condition when interest rate and output are at full employment level.

The effect of money supply on price levels in the long run

An increase in the money supply causes a proportional increase in its price levels. This needs to happen to maintain the equilibrium in the money market. 
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A permanent increase in money supply

Causes a proportional increase in the price level's long-run value. If the economy is initially at full employment, a permanent increase in the money supply eventually will be followed by a proportional increase in the price level.

The influence of a permanent increase in Ms on the exchange rate

A permanent increase in Ms causes a proportional long-run depreciation of its currency against foreign currencies. A permanent decrease in Ms causes a proportional long-run appreciation of its currency against foreign currencies.

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