In the short run, a permanent increase in the domestic money supply
A) has stronger effects on the exchange rate and output than an equal temporary increase.
B) has stronger effects only on the exchange rate but not on output than an equal temporary increase.
C) has weaker effects on the exchange rate and output than an equal temporary increase.
D) has stronger effects on output, but lower effect on the exchange rate than an equal temporary increase.
E) has weaker effects only on the exchange rate than an equal temporary increase.

Question

Quizplus · Accepted Answer

A permanent increase in the domestic money supply has stronger effects on the exchange rate and output than an equal temporary increase in the short run. This is because a permanent increase in the money supply leads to higher inflation expectations, causing the exchange rate to depreciate and output to increase as a result of increased aggregate demand. In contrast, a temporary increase in the money supply might lead to lower inflation expectations, resulting in weaker effects on the exchange rate and output.

In the Short Run, a Permanent Increase in the Domestic