Question

What is the short-run effect on the exchange rate of an increase in domestic real GNP, given expectations about future exchange rates?

Answer 1

The question here is the short-run effect on the exchange rates of an increase in domestic real GNP by giving expectations about the future exchange rates

In the graph above we can see that the demand function shifting away (outwards) which is given as L1 and L2.

The graph clearly states that as L1 and L2 moves away the domestic intrest rates R1 and R2 increases.

This could result in E1 and E2 change to higher rise in domestic currency

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