Question
In: Economics
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 with time on the horizontal axis, illustrate how each of the following variables changes over time (for India): nominal money supply MIN, price level PIN, real money supply MIN/PIN, interest rate iRs, and the exchange rate ERs/$. (1 mark)
c. Using your previous analysis, state how each of the following variables changes in the short run (increase/decrease/no change): India’s interest rate iRs, ERs/$, expected exchange rate EeRs/$, and price level PIN. (1 mark)
d. Using your previous analysis, state how each of the following variables changes in the long run (increase/decrease/no change relative to their initial values at point A): India’s interest rate iRs, ERs/$, EeRs/$, and India’s price level PIN. (1 mark)
e. Explain how overshooting applies to this situation. (1 mark)
Solutions
Rahul Sunny answered 2 years agoRelated Solutions
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