Chapter 16 Exercise. A Permanent Increase in the Money Supply 1.the short-run effect (1)A permanent increase in M s must ultimately lead to a proportional rise in E .The rise in M s causes E e to rise proportionally. (2)Because a rise in E e , the upward shift of AA 1 to
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A Permanent Increase in the Money Supply
1.the short-run effect
(1)A permanent increase in Ms must ultimately
lead to a proportional rise in E .The rise in Ms
causes Ee to rise proportionally.
(2)Because a rise in Ee, the upward shift of AA1 to
AA2 (permanent) is greater than caused by an
equal, but transitory, increase. (point 3)
(3)Point 2 is above XX CA(point2)>X
The current account improves.
2.the adjustment to the long run (Figure 16-15)
(1) Y2 > Yf working overtime W
(2)the output market
P q CA D Y
DD shifts left (DD1 DD2)
(3)the money market
P Ms/P ED R
R buying domestic currency E
AA shifts left (AA2 AA3)
(5)the current account
P q CA . To maintain CA=X ,
XX shifts upward gradually.
From point 1 to point 2, that E and Y rise
makes the different effects for CA.
through the Marshall-Lerner condition. That
Y rises makes import increase. Exchange rate
need depreciates higher to maintain at X level.
From point 2 to point 3, the short-run equilibrium
is above XX, the current account improves during
the adjusting process.
(6) E , Y returns to Yf
E¹ E² E³ overshooting
E and P rise in proportion to the increase
in the money supply. (Y returns to Yf )
Permanent Increase in the Money Supply