To aid in its efforts to get reelected, the current government of a country decides to increase the growth rate of the domestic money supply by two percentage points. The increased growth rate becomes “permanent” because once started it is difficult to reverse.
a. According to the monetary approach, how will this affect the long-run trend for the exchange-rate value of the country’s currency?
b. Explain why the nominal exchange-rate trend is affected, referring to PPP.