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Macroeconomics

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Open Short to Long

MACRO-VEZJMM

Assume that as a result of a permanent shock, a small open economy with flexible exchange rates is in a position where output is below the natural rate of output.

In the transition from the short run (prices are fixed) to the long run (prices are flexible), we would expect price levels to

, the real exchange rate to

, and output to

the natural rate of output.