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.

(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

(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.

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

(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 )

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

XX¹

XX²