i’ve got a finance question, please help!?
Combine the graph showing the interest parity condition and one showing
money demand and supply to demonstrate simultaneous equilibrium in the
money market and the foreign exchange market. How would an increase in
the U.S. money supply affect the Dollar/Euro exchange rate and the U.S.
interest rate? Illustrate your answer graphically and explain.
I know its impossible to graph it here, but please try to explain it in words if its possible, thanks alot!
I can’t graph anything on here… This is a common nominal exchange because it deals with currencies. With more US money supply, there is a gradual increase in inflation which is usually proportionate to the amount of money supply versus demand. If prices are higher, than the value of the US dollar has gone down. A common formula is:
E = e(P/P*)
E= Real Exchange rate
e= nominal exchange rate
P= domestic price level
P*= Price level in other countries
BTW, Money supply and interest rate share an indirect relationship. MS goes up… interest rate goes down because the federal reserve is buying bonds.
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