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Growth rate of the foreign money supply

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France and Germany have a fixed exchange rate. Suppose France is in recession and German output is at potential. Can the European Central Bank help France out by lowering its interest rate? How does this affect Germany? In addition, how could France and Germany coordinate fiscal policies to achieve potential output in both countries under a fixed exchange rate?

How to explain that a permanent rise in the growth rate of the foreign money supply affects the exchange rate and home output in the short and long runs.

Reference no: EM132422445

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