The Foundation of Modern Macroeconomics by monetary policy, but can be affected by fiscal policy. But we are really interested in the short-run dynamics implied by the model. To study this, we first reduce the model to two differential equations in e and p. For given values of the nominal exchange rate and the domestic price level, the domestic interest rate and output can be written as:

Y = (11.72) EmREyQ [p* + e - + EmREyGg + EyR(m - p)

EMR EMYEYR r= EMEYQ [p* + e - p] + EMYCYGg — (m — p) (11.73)

EMR EMYEYR