Ⅲ. Answer the following questions:
1. What is the short-run effect on the exchange rate when US government increases the money supply? (expectations about future exchange rate are unchanged)
2. Please draw a group of pictures to show the time paths of U.S. economic variables after a permanent increase in
the U.S. money supply growth rate according to the following:
(1)The u.s. decided to increase the money supply growth rate permanently. The vertical axis is money supply and the horizontal axis is time.
(2)The interest rate change,. The vertical axis is Dollar interest rate and the horizontal axis is time. (3)The price level change. The vertical axis is U.S price level and the horizontal axis is time.
(4)The exchange rate change,. The vertical axis is the Dollar/Euro exchange rate and the horizontal axis is time.
Ⅳ. CALCULATION
Suppose that the spot rate is