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If the growth rate of the money supply in one country is the same as the...

If the growth rate of the money supply in one country is the same as the growth rate of the money supply in another country, then over the long run the exchange rate between their two currencies should be unchanged. Do you agree or disagree with this statement? Why?

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Answer #1

False

an increase in money supply will change the price level in the same proportion in both countries given the Quantity theory of money. However in Quantity theory of money we assume certain assumptions which doesnot validate in real life. Also exchange rate is determined by various factor like interest rate in domestic and foreign countries, Income level which will determine the demand of net export and thus determine exchange rate etc. Thus concluding exchange rate only on the basis Of same growth rate of money supply is not good. Thus this statement is not true  

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