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This question examines the relationship between the Indian rupee (Rs) and the US dollar ($). We denote the exchange rate in rupees per dollar as ERS/$. Suppose the Bank of India permanently decreases its money supply by 4%. 1. First, consider the effect in the long run. Using the following equation, explain how the change in India's money supply affects the Indian price level, PIN, and the exchange rate, ERS/$: AERS/STIN ERS/$ - ·TUS = (MIN - 9IN) - (Mus - gus). MIN 2. How does the decrease in India's money supply affect the real money supply, in the long PIN run. 3. Based on your previous answer, how does the decrease in the Indian money supply affect the nominal interest rate, UN, in the long run? (hint: M = L(i)Y hold in the long run) 4. Illustrate the graphs to show how a permanent decrease in India's money supply affects India's money and FX markets in the long run. (hint: you may refer to the figures on lecture slides #5, titled "Analysis in the long run.") 5. Illustrate the graphs to show how a permanent decrease in India's money supply affects India's money and FX markets in the short run. (hint: you may refer to the figures on lecture slides #5, titled Permanent Expansion of the Home Money Supply, Short-Run Impact.) How do the nominal interest rate, IN, the spot exchange rate, ERS/$, change? 6. Compare the graphs you drew in questions 4 and 5. Describe how the short-run effects on the nominal interest rate in, the exchange rate, ERs/$, adjust toward the long-run equilibrium?

This question examines the relationship between the Indian rupee (Rs) and the US dollar ($). We denote the exchange rate in rupees per dollar as ERS/$. Suppose the Bank of India permanently decreases its money supply by 4%. 1. First, consider the effect in the long run. Using the following equation, explain how the change in India's money supply affects the Indian price level, PIN, and the exchange rate, ERS/$: AERS/STIN ERS/$ - ·TUS = (MIN - 9IN) - (Mus - gus). MIN 2. How does the decrease in India's money supply affect the real money supply, in the long PIN run. 3. Based on your previous answer, how does the decrease in the Indian money supply affect the nominal interest rate, UN, in the long run? (hint: M = L(i)Y hold in the long run) 4. Illustrate the graphs to show how a permanent decrease in India's money supply affects India's money and FX markets in the long run. (hint: you may refer to the figures on lecture slides #5, titled "Analysis in the long run.") 5. Illustrate the graphs to show how a permanent decrease in India's money supply affects India's money and FX markets in the short run. (hint: you may refer to the figures on lecture slides #5, titled Permanent Expansion of the Home Money Supply, Short-Run Impact.) How do the nominal interest rate, IN, the spot exchange rate, ERS/$, change? 6. Compare the graphs you drew in questions 4 and 5. Describe how the short-run effects on the nominal interest rate in, the exchange rate, ERs/$, adjust toward the long-run equilibrium?

Macroeconomics: Principles and Policy (MindTap Course List)
Macroeconomics: Principles and Policy (MindTap Course List)
13th Edition
ISBN:9781305280601
Author:William J. Baumol, Alan S. Blinder
Publisher:William J. Baumol, Alan S. Blinder
Chapter19: The International Monetary System: Order Or Disorder
Section: Chapter Questions
Problem 8DQ
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This question examines the relationship between the Indian rupee (Rs) and the US dollar ($). We denote the exchange rate in rupees per dollar as ERS/$. Suppose the Bank of India permanently decreases its money supply by 4%. 1. First, consider the effect in the long run. Using the following equation, explain how the change in India's money supply affects the Indian price level, PIN, and the exchange rate, ERS/$: AERS/STIN ERS/$ - ·TUS = (MIN - 9IN) - (Mus - gus). MIN 2. How does the decrease in India's money supply affect the real money supply, in the long PIN run. 3. Based on your previous answer, how does the decrease in the Indian money supply affect the nominal interest rate, UN, in the long run? (hint: M = L(i)Y hold in the long run) 4. Illustrate the graphs to show how a permanent decrease in India's money supply affects India's money and FX markets in the long run. (hint: you may refer to the figures on lecture slides #5, titled "Analysis in the long run.") 5. Illustrate the graphs to show how a permanent decrease in India's money supply affects India's money and FX markets in the short run. (hint: you may refer to the figures on lecture slides #5, titled Permanent Expansion of the Home Money Supply, Short-Run Impact.) How do the nominal interest rate, IN, the spot exchange rate, ERS/$, change? 6. Compare the graphs you drew in questions 4 and 5. Describe how the short-run effects on the nominal interest rate in, the exchange rate, ERs/$, adjust toward the long-run equilibrium?
Transcribed Image Text:This question examines the relationship between the Indian rupee (Rs) and the US dollar ($). We denote the exchange rate in rupees per dollar as ERS/$. Suppose the Bank of India permanently decreases its money supply by 4%. 1. First, consider the effect in the long run. Using the following equation, explain how the change in India's money supply affects the Indian price level, PIN, and the exchange rate, ERS/$: AERS/STIN ERS/$ - ·TUS = (MIN - 9IN) - (Mus - gus). MIN 2. How does the decrease in India's money supply affect the real money supply, in the long PIN run. 3. Based on your previous answer, how does the decrease in the Indian money supply affect the nominal interest rate, UN, in the long run? (hint: M = L(i)Y hold in the long run) 4. Illustrate the graphs to show how a permanent decrease in India's money supply affects India's money and FX markets in the long run. (hint: you may refer to the figures on lecture slides #5, titled "Analysis in the long run.") 5. Illustrate the graphs to show how a permanent decrease in India's money supply affects India's money and FX markets in the short run. (hint: you may refer to the figures on lecture slides #5, titled Permanent Expansion of the Home Money Supply, Short-Run Impact.) How do the nominal interest rate, IN, the spot exchange rate, ERS/$, change? 6. Compare the graphs you drew in questions 4 and 5. Describe how the short-run effects on the nominal interest rate in, the exchange rate, ERs/$, adjust toward the long-run equilibrium?
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