Which of the following conditions do NOT exist in long-run equilibrium?
A) Domestic nominal interest rates are such that the supply of real balances is equal to demand.
B) The domestic real return is equal to the foreign real return through the equilibrium exchange rate.
C) There are no price level or exchange rate changes and therefore the expected future exchange rate is equal to the actual exchange rate.
D) Domestic nominal interest rates are such that the supply of real balances is greater than demand.

Question

Quizplus · Accepted Answer

In long-run equilibrium, there should be no excess supply or demand for real balances, so option D is not possible. Options A, B, and C describe conditions that can exist in long-run equilibrium.

Which of the Following Conditions Do NOT Exist in Long-Run