Question 5: What are the short and long-term effect of monetary expansion in a small open economy with a flexible exchange rate? Assume that prices adjust more gradually than exchange rate and that economic agents do not expect the exchange rate to change in the future. Would exchange rate overshoots in the short run? What happens to real balances, price level and output overtime?
Question 5: What are the short and long-term effect of monetary expansion in a small open economy with a flexible exchange rate? Assume that prices adjust more gradually than exchange rate and that economic agents do not expect the exchange rate to change in the future. Would exchange rate overshoots in the short run? What happens to real balances, price level and output overtime?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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