Question

Explain how permanent shifts in national real money demand functions affect real and nominal exchange rates in the long run.

Answer 1

Solution -

The exact change in real money demand does not recognize the long-term real exchange
Since this being a monetary component. It does not even notice the nominal interest rate
Long term R is determined by the actual interest rate and the rate of entry (growth rate)
Price, which is O X D)

As a result, long-run price levels will be reduced to keep R-unchanged.
Accordingly o EUS = EU = QUS =EU PUS= PEU The long-term price level will make PUS nominally
The exchange rate was reduced. Therefore, due to the demand for real money, the actual exchange will occur
Unchanged and nominal appreciation rates.