Consider two countries: A and B. Imagine that the monetary policy of A is such that the money
supply increases at the rate gA>0 and, similarly, that the monetary policy of B involves an
increase in the money supply at gB>0. What is the prediction of the monetary approach about the
evolution of the nominal exchange rate in the long run? What about the real exchange rate?
Explain clearly all the steps of your reasoning. For the exercise, take the point of view of country
A and express the exchange rate using the quote under uncertainty (the price of B's currency in
terms of A's currency)..
Consider two countries A and B. Imagine that the monetary policy of .pdf
1. Consider two countries: A and B. Imagine that the monetary policy of A is such that the money
supply increases at the rate gA>0 and, similarly, that the monetary policy of B involves an
increase in the money supply at gB>0. What is the prediction of the monetary approach about the
evolution of the nominal exchange rate in the long run? What about the real exchange rate?
Explain clearly all the steps of your reasoning. For the exercise, take the point of view of country
A and express the exchange rate using the quote under uncertainty (the price of B's currency in
terms of A's currency).
