Present and explain the Fundamental Equation of the Monetary Approach.

Present and explain the Fundamental Equation of the Monetary Approach.

What will be an ideal response?

ANSWER

Assume = PUS/PE and that domestic price levels depend on domestic money demands and supplies:
PUS = MUSS/L(R$, YUS)
PE = MES/L( , YE)
Therefore, the exchange rate is fully determined in the long run by the relative supplies of those monies and the relative real demands for them. Shifts in interest rates and output levels affect the exchange rate only through their influence on money demand.