Decrease in canadian money supply

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Question

(Asset Approach to the Exchange Rate). Suppose there is a permanent decrease in the Canadian money supply.

1. With the aid of a diagram, representing the money market and the foreign exchange market, trace the short-run and long-run effects on the spot exchange rate E. Briefly explain your results.

2. In separate diagrams show the time paths of the price level P, the interest rate R and the spot exchange rate E as they adjust in the short-run and the long-run to the new lower Canadian money supply.

Reference no: EM133359362

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