topic 4 Box 1: Long run Topic 4 asks: how do prices, money, inflation, and the real exchange rate determine the exchange rate in the long run?

Part 1 — Permanent Change in the Level of Domestic Money Supply under the Asset Approach to the Exchange Rate

This section explains how a lasting increase in domestic money supply affects exchange rates through asset demand, influencing investor behavior in domestic and foreign markets.

Part 2 — Exchange Rate Overshooting

This part discusses how exchange rates can respond excessively to new information, leading to temporary deviations from their long-term equilibrium values.

Part 3 — Introduction (Chapter 4) & Purchasing Power Parity (PPP)

This section provides an overview of Chapter 4, focusing on the concept of Purchasing Power Parity, which posits that exchange rates should adjust to equalize the purchasing power of different currencies.

Part 4 — Monetary Approach to the Exchange Rate

This part outlines the monetary approach, suggesting that exchange rates are determined primarily by the relative supply and demand for money between countries.

Part 5 — Monetary Approach for the Case of On-going Inflation — Set Up

Here, the focus is on establishing a framework to analyze how ongoing inflation affects the monetary approach to exchange rates.

Part 6 — Monetary Approach for the Case of On-going Inflation — Analysis

This section analyzes the implications of ongoing inflation within the monetary approach, demonstrating its effects on exchange rate determination.

Part 1 — Real Exchange Rate

This part explains the real exchange rate, which adjusts the nominal exchange rate for inflation differentials between two countries.

Part 2 — Generalized Approach to the Exchange Rate — Set-up

This section introduces the generalized approach, which encompasses various factors influencing exchange rates beyond simple monetary factors.

Part 3 — Money Market Shocks under the Generalized Approach to the Exchange Rate

This part analyzes how sudden changes in the money market affect exchange rates within the generalized framework.

Part 4 — Output Market Shocks under the Generalized Approach to the Exchange Rate

This section discusses how shocks in output markets, such as changes in goods availability, impact exchange rates.

Part 5 — Derivation of Real Interest Parity

This part derives the concept of real interest parity, stating that differences in real interest rates between countries should equate with expected changes in exchange rates.