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What are the predictions for the long run of the Monetary Approach?
Answer: Money supplies- Known the equations
E$/E = PUS/PE
PUS = MSUS/L(R$, YUS) PE = MSE/L(RE, YE)
One is able to show that an increase in the U.S money supply MSUS that causes a proportional raise in the U.S price level PUS which in turn causes a proportional increase in E$/€. Therefore a raise in U.S money supply causes a proportional long-run depreciation of the dollar against the euro and vice versa.
Interest rates: An increase in the interest rate R$ lowers U.S money demand L(R$, YUS) thus causing a rise in the U.S price level and a proportional depreciation of the dollar against the euro.
Output levels: A rise in U.S output YUS increases real U.S money demand leading to a fall in the long-run U.S price level and an appreciation of the dollar against the euro.
diagram
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