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### Long-Run Effects of Permanent Money Supply Increase on Exchange Rates and Current Account Balance ###

This chapter analyzes the short-run and long-run effects of a permanent increase in the money supply on the exchange rate (E) and the current account (CA). Initially, a rise in the money supply leads to a proportional increase in the exchange rate and an improvement in the current account. As the economy adjusts, output returns to its natural level (Yf), influencing import levels and necessitating a depreciation of the exchange rate to maintain balance. The analysis utilizes economic models to illustrate these relationships, revealing the concept of money neutrality and its implications for economic equilibrium. ###

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### Long-Run Effects of Permanent Money Supply Increase on Exchange Rates and Current Account Balance ###

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  1. Chapter 16 Exercise 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. (4) E , Y , Y2 > Yf , CA 2.the adjustment to the long run (Figure 16-15) (1) Y2 > Yf working overtime W AC P (2)the output market P q CA D Y DD shifts left (DD1 DD2) (3)the money market P Ms/P ED R

  3. (4)the foreign exchange market 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. CA=CA(EP*/P,Y-T) From point 1 to point 2, that E and Y rise makes the different effects for CA.

  4. That E rises makes the improvement of 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

  5. (7)money neutrality (貨幣中立性) E and P rise in proportion to the increase in the money supply. (Y returns to Yf )

  6. Figure 16-15 Long-Run Adjustment to a Permanent Increase in the Money Supply Chapter 16 XX² XX¹

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