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In this paper the basic monetary model of exchange rate determination is extended to capture the impact of real shocks in explaining rate behavior. The model is tested using the dollar/pound rate of exchange over the period 1978-1985. The present work modifies the standard model by incorporating the relative price of oil on the demand for money. Results of the test confirm the statistical significance of the variables specified by the model in determining the value of the pound sterling during this time period. [431]
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