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Exchange Rate

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Examine the effects of a change in the money supply in an open economy under a flexible exchange rate system. How are your conclusion affected by the adoption of a fixed exchange rate?

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Solution Summary

This solution looks at an exchange rate problem under both a flexible and fixed exchange rate system.

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Let's start from a system in equilibrium (money supply = money demand). If the money supply increases than there will be a surplus of money in the market: there will be more lenders than borrowers. ...

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