Assignment:
Q1 a. Draw a diagram with money demand and money supply curves. Explain why the money demand curve is downward sloping. Find the equilibrium interest rate.
b. Shift one of these curves to show if there is an increase in the U.S. money supply, and find the new equilibrium interest rate.
c. Draw a figure describing both the U.S. money market and the foreign exchange market, analyze the effects of this increase in the U.S. money supply on the dollar/euro exchange rate.
Q2. List and explain determinants of foreign exchange rate based on the purchasing power parity and the interest rate parity. What is the absolute purchasing power parity? What is the relative purchasing Power parity?
Q3. a. "What is exchange rate over model?
b. Show the overshooting graphically by using 4 different figures, Plot the time paths showing the effects of a permanents increase in the United States money supply on:
(1) U.S Money Supply.
(2) The dollar interest rate
(3) The U.S. price level.
(4) The dollar/eur exchange rate.