Exchange rate determination is the main issue in the field of
international finance, under flexible prices assumption, what are the two building
blocks that economists use to derive the simple monetary model of exchange rate?
What is the model of money demand? Please show the logarithm linearlized real
money demand function. What is assumed to affect the money demand function?
According to the two building blocks, show the exchange rate is a function of the
fundamentals. What are those “fundamentals” that determine the value of the
equilibrium exchange rate? Describe how an expansionary monetary policy will
affect the exchange rate according to the model. How will the output affect the
exchange rate?