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