What will happen to the real exchange rate

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Suppose that the relative supply of domestic products decreases while the relative demand does not change.

a. What will happen to the real exchange rate? Explain using a figure.

b. What will happen to the demand of real money balances in the domestic economy? Explain using a proper equation.

c. What will happen to the average domestic price level? Explain using a proper equation. (Assume that there is no change in money supply.)

d. What will happen to the nominal exchange rate? Explain using a proper equation.

Reference no: EM133126300

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