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| Use the money market and FX diagrams from (a) to answer the following questions. This question considers the relationship between the Indian rupees (Rs) and the U.S. dollar ($). The is in rupees per dollar, ERs/$. On all graphs, label the initial equilibrium point A. a. Illustrate how a permanent increase 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. 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, India’s interest rate iRs, and the ERs/$. c. Using your previous analysis, state how each of the following variables changes in the short run (increase/decrease/no change): India’s interest rate iRs, ERs/$ EeRs/$, and India’s price level PIN. d. Using your previous analysis, state how each of the following variables changes in the long run (increase/decrease/no change relative to their initial values at point A): India’s interest rate iRs, ERs/$ EeRs/$, India’s price level PIN. e. Explain how overshooting applies to this situation. |
