In our discussion of short-run exchange rate overshooting, we assumed real output (Y) wasconstant. Assume instead that an increase in the money supply raises real output in theshort run (an assumption...

In our discussion of short-run exchange rate overshooting, we assumed real output (Y) wasconstant. Assume instead that an increase in the money supply raises real output in theshort run (an assumption that will be justified in a few lectures). How does this a?ect theextent to which the exchange rate overshoots when the money supply first increases? Is itlikely that the exchange rate undershoots? (Hint: In the money market equilibrium, allowaggregate real money demand schedule to shift in response to the increase in output).