Predict Changes in the Euro–Dollar Exchange Rate
How to Work with the Purchasing Power Parity (PPP)
Combine the Money Market with the Foreign Exchange Market

Establish Money Market Equilibrium

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The money market equilibrium, with the equilibrium real interest rate, r1, and the equilibrium quantity of real money, m1.

Remember the variables that can shift the money demand and supply curves. In the next example, a change in the country’s output and nominal money supply is applied to the money market. You can predict how the real interest rate and the real quantity of money in the money market change.

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