Use the money market and fx graphs to answer the following

Question

Short-Run and Long-Run FX

Use the money market and FX graphs to answer the following questions. The US is the home country, and Britain is the foreign country (E = $/£). The question concerns the short-run and long- run effects of a temporary decrease in the US money supply.

a. Show how a temporary decrease in the US money supply affects the money and FX markets. Use point A to label the initial equilibrium, and usepoints B and C to label the short-run and long-run equilibria, respectively.

b. Explain how each of the following variables changes in the short run(increase, decrease, or remain constant?): i_US, i_BR, E, E^e, and P.

c. Explain how each of the following variables changes in the long run(increase, decrease, or remain constant, relative to point A): i_US, i_BR, E, E^e,and P.