Question

using a well labelled graph, explain how the real exchange rate between the US and EU is determined in the long-run. also, explain the slopes of the demand and supply curves in your graph. if there is an increase in the relative demand for european goods, what will happen to the real exchange rate?

Answer 1

which are the long relative supply ecoss (1) The exchange rate is determined in hy prices determined by the relative of money across counbies and relative real demand of countries causing a proportional depreciation in the domestic currency If there is an increase in the relative elemands for European goods European expost will increase and exports will be more than imports. This will increase the value European currency with respect to dollar. Then

Real exchange rate RS RD Ratio of U.S. to European real output (Yus/Y) (Yus/Y.' Figure 15-4 Determination of the Long-Run Real Exchange Rate The long-run equilibrium real exchange rate equates world relative demand to the full- employment level of relative supply.
In the long run supply of good and services in each country depends on factors of production like labour, capital and technology not price and exchange rate.

The demand of us product relative to the demand for EU products depends on relative price of this product or the real exchange rate. When the real exchange rate q_US/EU=(E_$/€P_EU​​​​​​)/P_US is high the relative demand for US product is high.

When the relative supply of US product math the relative demand of US product. There is tendency for the price of US product relative to EU product to change.