Exchange Rate Equilibrium 8) Show graphically the short and long-run effects of an increase in the supply of Euros by the European Central Bank on the rate of returns of US assets (R$) and on the exchange rate, E $ 9) Suppose there is a decrease in aggregate real money demand due to a sudden decrease in GDP (c.g. natural disaster), that a negative shift in the aggregate real money demand function. Trace the short and long-run effects on the exchange rate, interest rate and price levels. Use the asset approach to the balance of payments (chapters 14 (3) and 15 (4)]. 10) The velocity of money, V, is defined as the ratio of real GNP to real money holdings. Then, in chapter 15 (4) notation V=Y/(M/P). Use equation 4 in chapter 15 (4) to derive an expression for velocity and explain how velocity varies with changes in R and Y. (Hint: the effect of output changes on V depends on the elasticity of aggregate money depend with respect to output, which economists believe to be less than one). What is the relationship between velocity and the exchange rate? 11) Explain (graphically) why an increase in the money supply generates an overshoot of the exchange rate in the short run in the "Asset Approach" to the balance of payments. Explain the figure thoroughly. Exchange Rate Equilibrium 8) Show graphically the short and long-run effects of an increase in the supply of Euros by the European Central Bank on the rate of returns of US assets (R$) and on the exchange rate, E $ 9) Suppose there is a decrease in aggregate real money demand due to a sudden decrease in GDP (c.g. natural disaster), that a negative shift in the aggregate real money demand function. Trace the short and long-run effects on the exchange rate, interest rate and price levels. Use the asset approach to the balance of payments (chapters 14 (3) and 15 (4)]. 10) The velocity of money, V, is defined as the ratio of real GNP to real money holdings. Then, in chapter 15 (4) notation V=Y/(M/P). Use equation 4 in chapter 15 (4) to derive an expression for velocity and explain how velocity varies with changes in R and Y. (Hint: the effect of output changes on V depends on the elasticity of aggregate money depend with respect to output, which economists believe to be less than one). What is the relationship between velocity and the exchange rate? 11) Explain (graphically) why an increase in the money supply generates an overshoot of the exchange rate in the short run in the "Asset Approach" to the balance of payments. Explain the figure thoroughly
