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Chapter 4 (The foreign return curve shifts upward when there is a rise in…
Chapter 4
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Real money demand is greater than real money supply when the interest rate is below the equilibrium interest rate.
An increase in the foreign money supply lowers the foreign interest rate, which lowers the foreign return in the FX market and causes the domestic currency to appreciate.
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A decrease in the foreign money supply increases the foreign interest rate, which increases the foreign return in the FX market and causes the domestic currency to depreciate.
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Borrowers will want to borrow more when the interest rate is lower than the equilibrium interest rate.
An increase in the domestic money supply lowers the domestic return in the FX market and causes the domestic currency to depreciate.
The exchange rate is an input in the model (an exogenous variable), and the money supply is an output of the model (an endogenous variable).
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Fixed or pegged exchange rates fluctuate very little, if at all.
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