Use the money market equilibrium and Foreign Exchange (Forex) market equilibrium to answer the following questions....

Use the money market equilibrium and Foreign Exchange (Forex) market equilibrium to answer the following questions.

In the FX market diagram, the exchange rate is in U.S. dollars per British pound, (E$/£ ) and it is on the X-axis. Rates of return are on the Y-Axis.

The US Federal Reserve lowers the money supply permanently.

What happens to the price level in the short run?

Show the short run change in the US money market equilibrium using a diagram.

Describe the short-run impact on interest rate and real money supply in the US.

What happens to the price level in the long run?

Show the long run change in the US money market equilibrium using a diagram.

Describe the long-run impact on interest rate and real money supply in the US.

What happens to the expected exchange rate?

Show the short run change in Forex market equilibrium diagram.

Describe the short-run impact on the spot exchange rate.

Show the long run change in Forex market equilibrium diagram.

Describe the long-run impact on the spot exchange rate.

Answer (i) – (viii) above in each of the following cases.

US Federal Reserve lowers money supply temporarily.

There is a permanent drop in US real money demand.

US Federal Reserve announces its plans to permanently decrease its money supply but doesn’t actually implement this policy.

Bank of England permanently decreases its money supply but this change is not anticipated by market players.

Solutions

Expert Solution

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

Use the money market equilibrium and Foreign Exchange (Forex) market equilibrium to answer the following questions....

Use the money market equilibrium and Foreign Exchange (Forex) market equilibrium to answer the following questions. In the FX market diagram, the exchange rate is in U.S. dollars per British pound, (E$/£ ) and it is on the X-axis. Rates of return are on the Y-Axis. US Federal Reserve lowers money supply temporarily. a. What happens to the price level in the short run? b. Show the short run change in the US money market equilibrium using a diagram. c....

Use the money market equilibrium and Foreign Exchange (Forex) market equilibrium to answer the following questions....

Use the money market equilibrium and Foreign Exchange (Forex) market equilibrium to answer the following questions. In the FX market diagram, the exchange rate is in U.S. dollars per British pound, (E$/£ ) and it is on the X-axis. Rates of return are on the Y-Axis. US Federal Reserve announces its plans to permanently decrease its money supply but doesn’t actually implement this policy. a. What happens to the price level in the short run? b. Show the short run...

Use the money market equilibrium and Foreign Exchange (Forex) market equilibrium to answer the following questions....

Use the money market equilibrium and Foreign Exchange (Forex) market equilibrium to answer the following questions. In the FX market diagram, the exchange rate is in U.S. dollars per British pound, (E$/£ ) and it is on the X-axis. Rates of return are on the Y-Axis. US Federal Reserve announces its plans to permanently decrease its money supply but doesn’t actually implement this policy. v) Show the long run change in the US money market equilibrium using a diagram. vi)...

Use the money market equilibrium and Foreign Exchange (Forex) market equilibrium to answer the following questions....

Use the money market equilibrium and Foreign Exchange (Forex) market equilibrium to answer the following questions. In the FX market diagram, the exchange rate is in U.S. dollars per British pound, (E$/£ ) and it is on the X-axis. Rates of return are on the Y-Axis. i) What happens to the price level in the short run? d.US Federal Reserve announces its plans to permanently decrease its money supply but doesn’t actually implement this policy. ii) Show the short run...

Use the money market equilibrium and Foreign Exchange (Forex) market equilibrium to answer the following questions....

Use the money market equilibrium and Foreign Exchange (Forex) market equilibrium to answer the following questions. In the FX market diagram, the exchange rate is in U.S. dollars per British pound, (E$/£ ) and it is on the X-axis. Rates of return are on the Y-Axis. The US Federal Reserve lowers the money supply permanently. v) Show the long run change in the US money market equilibrium using a diagram. vi) Describe the long-run impact on interest rate and real...

Use the foreign exchange and money market diagrams to answer the following questions about the relationship...

Use the foreign exchange and money market diagrams to answer the following questions about the relationship between the Indian rupee (INR) and the Euro (EUR). Let the exchange rate be defined as rupees per yuan EINR/Eur. Suppose there is a fall in the Indian nominal money supply. Make the usual assumptions: UIP holds, PPP holds in the long run, prices are sticky in the short run, (20p) . Assume first that the fall in money supply is temporary (so that...

Exercise 1 Use the money market and foreign exchange (FX) diagrams to answer the following questions....

Exercise 1 Use the money market and foreign exchange (FX) diagrams to answer the following questions. This question considers the relationship between the euro and the U.S. dollar ($). The exchange rate is in U.S. dollars per euro, E$/e. Suppose that with financial innovation in theUnited States, real money demand in the United States decreases. On all graphs, label the initial equilibrium point A. (a) Assume this change in U.S. real money demand is temporary. Using the FX and money...

Use the money market with the general monetary model and foreign exchange (FX) market to answer...

Use the money market with the general monetary model and foreign exchange (FX) market to answer the following questions. The questions consider the relationship between the U.K. pound (£) and the Australian dollar ($). Let the exchange rate be defined as Australian dollars per pound, E$/£. In the U.K., the real income (Y£) is 10.00 trill., the money supply (M£) is £50.00 trill., the price level (P£) is £10.00, and the nominal interest rate (i£) is 2.00% per annum. In...

Use the money market and FX diagrams to answer the following questions.

Use the money market and FX diagrams to answer the following questions. This question considers the relationship between the Indian rupee (Rs) and the U.S. dollar ($). The exchange rate is in rupees per dollar, ERs/$. On all graphs, label the initial equilibrium point A.a. Illustrate how a permanent decrease in India’s money supply affects the money and FX markets. Label your short-run equilibrium point B and your long-run equilibrium point C. (1 mark)b. By plotting them on a chart...

Please answer All of following questions 1. Given an initial equilibrium in the money market and...

Please answer All of following questions 1. Given an initial equilibrium in the money market and foreign exchange market, suppose the Federal Reserve decreases the money supply of the United States. Under a floating exchange rate system, the dollar would: a. Depreciate in value relative to other currencies b. Be officially revalued by the government c. Appreciate in value relative to other currencies d. Be officially devalued by the government 2. Which of the following is not a potential disadvantage...

Subjects