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Consider an economy operating with a flexible exchange rate which is initially in) long-run equilibrium at point 1 in the diagram below, where: Y= Y
Consider an economy operating with a flexible exchange rate which is initially in) long-run equilibrium at point 1 in the diagram below, where:
Y= Y1= Yf; R= R1= R*; and E = Ee = E1
There is then a permanent DECREASE in the nominal money supply of the economy (MS), with no change in any other exogenous variable.In the short-run the economy moves to a new SHORT-RUN equilibrium at point 2 in the diagram, where output equals Y2 Y1= Yf and the exchange rate equals E2 E1.
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