Consider the COVID-19 pandemic and the ongoing financial developments for building your arguments for the following question. a. Explain the short-run and long-run effects of the adjustment of the dollar/euro exchange rate following a permanent increase in the U.S. money supply and show those effects on the related diagrams. Suppose the economy starts with all variables at their long-run levels and that output remains constant as the economy adjusts to the money supply change. b.Explain the exchange rate overshooting with the help of the diagrams that you drew for part a. Why is the exchange rate overshooting an important phenomenon? What does it help to explain?
Consider the COVID-19 pandemic and the ongoing financial developments for building your arguments for the following question.
a. Explain the short-run and long-run effects of the adjustment of the dollar/euro exchange rate following a permanent increase in the U.S. money supply and show those effects on the related diagrams. Suppose the economy starts with all variables at their long-run levels and that output remains constant as the economy adjusts to the money supply change.
b.Explain the exchange rate overshooting with the help of the diagrams that you drew for part a. Why is the exchange rate overshooting an important phenomenon? What does it help to explain?
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