The monentry approach to exchange rate determination 1976). Consider a small ope

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The monentry approach to exchange rate determination 1976). Consider a small open enconomy with interest-elastic money demand in which both uncovered intersest parity and purchasing power parity hold and labour is always fully employed: Show: The exchange rate obeys where is exogenous. Show that the current exchange rate depends on the expectations about the entire future time path for xt: How does the exchange rate react to an increase in the expectation of the domestic money stock ten periods later mt+10? Explain this result.

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