Sem 2 content Flashcards
(6 cards)
1
Q
Key points about long run exchange rate determination
A
Money supply does not affect inflation in the long run, seen when looking at its impacts in Latin America
2
Q
Effects of changes in the money supply in the short run
A
3
Q
Effects of changes in money supply in the long run
A
The expected inflation in the short run leads to actual inflation which decreases real money supply and hence gradually boosts interest rates. There is overshooting.
4
Q
How well does the PPP model hold
A
Empirical evidence shows short run deviations so it does not hold well at all.
In the long run holds better but still imperfectly
5
Q
Why does PPP not hold well
A
Price stickiness
Transport costs and trade barriers
Exchange rate volatility
Imperfect competition - leads to price discrimination
6
Q
A
