Question

On a separate sheet of paper. Using a figure describing both the U.S. money market and the foreign exchange market, analyze the effects of a temporary increase in the European money supply on the dollar /euro exchange rate.

Answer 1

An increase in cash flexibly moves cash gracefully curve to right, decreasing interest rate and expanding amount of cash.

In following graph, MD0 and MS0 are starting cash interest and flexibly curves, meeting at point A with beginning interest rate r0 and amount of cash M0. At the point when MS0 moves right to MS1, it converges MD0 at point B with lower interest rate r1 and higher amount of cash M

(b)

Higher money supply shifts LM curve rightward, lessening homegrown interest rate. At the point when interest rate falls, net capital outflow increments. As net capital outflow is equivalent to net fares, higher net capital outflow builds net fares, which diminishes conversion standard (devaluing homegrown money).

In following graph, board A shows IS and LM curves. IS0 and LM0 are starting IS and LM curves meeting at point A with beginning interest rate r0 and introductory yield Y0.

As money supply expands, LM0 moves right to LM1, meeting IS0 at point B with lower interest rate r1 and higher yield Y1.

In board B (indicating net capital outflow as backwards capacity of interest rate), lower interest rate from r0 to r1 builds net capital outflow from NCO0 to NC01.

In board C (indicating net fares as reverse capacity of swapping scale), an expansion in net capital outflow from NCO0 to NCO1 builds net fares from NX0 to NX1 and diminishes conversion standard from e0 to e1.