Question

Can you explain how the long run model exchange rate affect gdp in relation to inflation?

Answer 1

The long run model exchange rate affects GDP in relation to inflation:

The long run model exchange rate provides framework to forecast future exchange rate by analyzing current market situations. If the exchange rate is high that means the value of currency is appreciated as compare to the foreign currency and if value of currency is high that means inflation level is low and GDP is rising and if the currency value is depreciating that means inflation level is high which leads to decrease in GDP. When the long run model exchange rate predicts that the exchange rate is going to increase in the future than the inflation rate decreases which rises GDP of a country and if they forecast decrease in exchange rate than the value of currency depreciates which leads to high inflation and low GDP.