Monetary Policy and Exchange Rates

The long-term effect of a change in the money supply on the nominal interest rate is negligible. The interest rate returns to its original level, meaning that the impact is temporary.

In the long run, an increase in the money supply leads to a proportionate increase in the price level. This reflects the classical dichotomy, where real variables are unaffected by changes in the money supply in the long run.

A change in the money supply affects both the actual and expected exchange rates in the long run. This is because the real exchange rate adjusts to maintain purchasing power parity.

The exchange rate overshoots its long-run equilibrium value following a change in the money supply due to differences in adjustment speeds across markets. This is a short-term phenomenon that eventually corrects itself.

Monetary policies are less effective in the long run when the exchange rate is fixed because the classical dichotomy holds. Real variables are unaffected by changes in the money supply.

Monetary policies are less effective in the short run when the exchange rate is fixed. The central bank loses control over the money supply because of its commitment to maintain the fixed exchange rate.

Expansionary monetary policy always affects both the real and nominal exchange rates in the long run because it influences relative prices and the trade balance

In the short run, a change in the money supply can affect the real and nominal exchange rates depending on the type of change, the initial equilibrium and the specific conditions in the economy.

Directly links changes in money supply to exchange rate movements. Assumes money market equilibrium determines interest rates, and these influence exchange rate through the UIP condition.

A model where the exchange rate adjusts instantaneously to changes in monetary policy, with no time lags or dynamics.

States that the expected return on an asset in one currency should equal the expected return on a similar asset in another currency adjusted for the expected exchange rate change.

The increase in domestic interest rates caused by a contractionary monetary policy leads to an appreciation of the domestic currency.

The relationship between the prices of goods in different countries, adjusted by the exchange rate. It suggests that the prices of identical goods should be the same in different countries after taking into account the exchange rate.

The exchange rate determined by the equilibrium in the money market, where supply and demand for money balance.

A situation in the short run where prices are fixed and exchange rates adjust to reflect changes in monetary policy.

In the long run, prices adjust to changes in money supply, and the exchange rate reflects these changes in the price level.

The spread of economic shocks beyond what can be explained by economic fundamentals. It's like a domino effect where a crisis in one country triggers similar problems in others.

Actions taken to reduce government spending and control inflation. This often involves cuts to public programs and a tighter monetary policy.

A situation where international organizations provide assistance to a country facing a financial crisis. This can involve loans, technical support, and other forms of aid.

A situation where a government or financial institution takes on more risk because they believe they will be bailed out if things go wrong. This can lead to reckless behavior.

The depreciation of the currency of a country (for example, the Thai Baht) leading to investors withdrawing their investments from other countries in the region (for example, all of Asia).

A drastic economic plan implemented in Brazil in 1994 to stabilize the currency and control rampant inflation (3000% per year). It involved fixing prices and wages, controlling money supply, and pegging the Real to the US dollar.

A situation where an international financial system is designed to prevent global crises. This might lead to governments and banks taking more risks, as they rely on being rescued in case of trouble.

The rapid decline in the value of a country's currency, typically caused by a loss of confidence in the country's economy or its ability to repay its debts.

A model that assumes fixed exchange rates and perfect capital mobility. It analyzes how changes in monetary and fiscal policy affect the economy.

The adjustment process where the exchange rate initially overshoots the long-term equilibrium and then gradually converges back. This occurs after a shock to the money supply.

The model that considers the interaction of the asset market and the money market to determine the exchange rate. It acknowledges that investors' expectations about the future influence the current exchange rate.

The exchange rate based on the expectations of market participants about the future exchange rate.

The rate at which one currency can be exchanged for another, influenced by factors like interest rate differentials and market expectations.

In the short run, an increase in the domestic money supply causes the domestic currency to depreciate.

This rule states that the difference in inflation rates between two countries equals the difference in their nominal interest rates.

In the long run, monetary policy becomes ineffective for influencing real variables due to the complete adjustment of prices to changes in the money supply.

An assumption that expectations about the future exchange rate are constant, meaning traders don't anticipate changes in the expected future exchange rate.

The idea that only changes in real factors (like productivity or technology) affect real variables like output or employment in the long run; changes in the money supply only affect prices.

The adjustment of prices to changes in the money supply, resulting in no real economic effect in the long run.

The Classical Dichotomy states that in the long run, only nominal variables are impacted by monetary changes. It means that the real economy is unaffected by changes in the money supply.

In the short run, an increase in the money supply leads to a decrease in the real interest rate. This happens because the increase in money supply lowers the cost of borrowing, stimulating investment and economic activity.

A monetary shock can cause significant fluctuations in the nominal exchange rate, especially in the short run. This is due to investor reactions and expectations about future exchange rate movements.

Sterilization is a policy used by central banks to offset the impact of foreign currency inflows or outflows on the domestic money supply. This involves buying or selling domestic assets to maintain a target level of liquidity.

Sterilization can temporarily control the impact of foreign currency inflows or outflows, but it cannot be sustained indefinitely. Changing the composition of assets alters the risk profile, affecting the uncovered interest rate parity (UIP) and the yield curve.

Under a fixed exchange rate regime, a loss of foreign reserves leads to a contraction in the money supply. This is because the central bank needs to sell domestic assets to defend the fixed exchange rate, reducing the overall money supply.

An expansionary monetary policy by the European Central Bank (ECB) would involve lowering interest rates and increasing the money supply. This could stimulate economic activity in the Euro area.

The ECB's expansionary monetary policy would likely lead to an appreciation of the Euro's exchange rate. This is because the lower interest rates would make holding Euros less attractive to investors, potentially leading to a decrease in demand for other currencies and an appreciation of the Euro.