Question

Use the foreign exchange and money market diagrams to answer the following questions about the relationship between the Indian rupee (INR) and the Euro (EUR). Let the exchange rate be defined as rupees per yuan EINR/Eur. Suppose there is a fall in the Indian nominal money supply. Make the usual assumptions: UIP holds, PPP holds in the long run, prices are sticky in the short run, (20p)

-- Now assume instead that the fall in money supply is permanent. Illustrate this in a pair of graphs, one for the Indian money market and one for the foreign exchange market. Label the initial equilibrium as point A, the short-run equilibrium point B and your long-run equilibrium point C.







c. For the case you just analyzed above (permanent shock), plot a graph for each of the following variables over time showing the initial equilibrium, short run equilibrium, and the long run equilibrium: India’s nominal money supply, India’s interest rate, India’s price level, India’s real money supply, and the exchange rate EINR/EUR.

Please I want the last part

Answer 1