Effects of a one-time rise in the foreign price level

Reference no: EM131167763

Use the DD-AA model to examine the effects of a one-time rise in the foreign price level, P*. If the expected future exchange rate falls immediately in proportion to (in line with PPP), show that the exchange rate will also appreciate immediately in proportion to the rise in P*. If the economy is initially in internal and external balance, will its position be disturbed by such a rise in P*?

Reference no: EM131167763

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