Question

In the short run of a model with sticky prices, a reduction in the money supply raises the nominal interest rate and appreciates the currency. In this case the country's expected real interest rate will _________.

In addition, the real exchange rate, after initially ____________,
The latter movement of the real exchange rate satisfies the real interest parity condition which indicates that a country's currency will be expected to undergo a real V l subsequently depreciation when its real interest rate ___________real interest rates elsewhere

Answer 1

In the short run of a model with sticky prices, a reduction in the money supply raises the nominal interest rate and appreciates the currency. In this case the country's expected real interest rate will rise.

In addition, the real exchange rate, after initially appreciating will depreciate ,

The latter movement of the real exchange rate satisfies the real interest parity condition which indicates that a country's currency will be expected to undergo a real V l subsequently depreciation when its real interest rate exceeds real interest rates elsewhere.