Interest Rate Determination

Comparative Statics in the Combined Money-Forex Model

Learning Objective

1. Show the effects of an increase in the money supply and an increase in GDP on the interest rate and exchange rate using the two-quadrant money-Forex market diagram.

Comparative statics is any exercise examining how the endogenous variables will be affected when one of the exogenous variables is presumed to change, while holding all other exogenous variables constant. Holding other variables constant at their original values is the "ceteris paribus" assumption. We will do several such exercises here using the combined money-Forex market diagram.