Problem
1. In the portfolio balance model, what effect will a rise in id have on the value of the domestic currency with a flexible exchange rate? Why? Why would this not be the result in the monetary approach?
2. "An increase in a country's money supply can result in a depreciation of the country's currency that ‘overshoots' its long-run equilibrium level." Defend this statement.
3. What reasons can you suggest to support the standard assumption that asset markets adjust more rapidly to a disequilibrium situation than do goods markets?