Answer to Question #181839 in Economics for Gwen

Question

Assume when a country is operating at full employment level, but expansionary monetary policy continue to be executed causes excessive exchange rate fluctuation in the short run. Explain how excessive exchange rate fluctuation affect domestic price level and domestic interest rate in both short run and long run. 

Answer 1

Excessive exchange rate fluctuation increases domestic price level and decrease domestic interest rate in the short run, and in the long run they will continue to increase and decrease until the output return back to the full employment level.