Question 4 Use the money market and FX diagrams to answer the following questions about the relationship between the British pound and the U.S. dollar. The exchange rate is in U.S. dollars per British pound, E$/pound. We want to consider how a change in the U.S. money supply affects interest rates and exchange rates. On all graphs, label the initial equilibrium point A. (a) Illustrate how a temporary increase in the U.S. money supply affects the money and FX markets. Label your short-run equilibrium point B and your long-run equilibrium point C. (b) Using your diagram from (a), state how each of the following variables changes in the short run (increase/decrease/no change): U.S. interest rate, British interest rate, E$/pound, E e$/pound, and the U.S. price level P. (c) Using your diagram from (a), state how each of the following variables changes in the long run (increase/decrease/no change relative to their initial values at point A): U.S. interest rate, British interest rate, E$/pound, E e$/pound, and U.S. price level P
Question 4
Use the
between the British pound and the U.S. dollar. The exchange rate is in U.S. dollars per British
pound, E$/pound. We want to consider how a change in the U.S. money supply affects interest
rates and exchange rates. On all graphs, label the initial equilibrium point A.
(a) Illustrate how a temporary increase in the U.S. money supply affects the money and FX
markets. Label your short-run equilibrium point B and your long-run equilibrium point C.
(b) Using your diagram from (a), state how each of the following variables changes in the
short run (increase/decrease/no change): U.S. interest rate, British interest rate, E$/pound,
E
e$/pound, and the U.S. price level P.
(c) Using your diagram from (a), state how each of the following variables changes in the
long run (increase/decrease/no change relative to their initial values at point A): U.S. interest
rate, British interest rate, E$/pound, E
e$/pound, and U.S. price level P
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