what are the predictions for the long run of the

Question

What are the predictions for the long run of the Monetary Approach?

Answer:     Money supplies- Known the equations

                                                         E_$/E = P_US/P_E

                                   P_US = M^S_US/L(R_$, Y_US) P_E = M^SE/L(R_E, Y^E)

 

One is able to show that an increase in the U.S money supply MSUS that causes a proportional raise in the U.S price level PUS which in turn causes a proportional increase in E_$/€. Therefore a raise in U.S money supply causes a proportional long-run depreciation of the dollar against the euro and vice versa.

 

Interest rates:  An increase in the interest rate R$ lowers U.S money demand L(R_$, Y_US) thus causing a rise in the U.S price level and a proportional depreciation of the dollar against the euro.

Output levels: A rise in U.S output YUS increases real U.S money demand leading to a fall in the long-run U.S price level and an appreciation of the dollar against the euro.