True or False?
True! Equilibrium is determined by the intersection of LM and ZZ, and both must pass through the vertical line YF. The price level must adjust to ensure that the LM curve crosses through YF along ZZ. And, given that price level, the nominal exchange rate must adjust to ensure that the IS curve passes through that LM-ZZ-YF intersection. Changes in the demand for money will put rightward or leftward pressure on the LM curve but the price level will rise or fall to keep the curve from actually moving. And the nominal exchange rate will adjust to keep Q at a level that will ensure that the IS curve continues to cross through the ZZ-YF intersection. The real exchange rate will thus be unaffected by monetary shocks.