Use the money market and FX diagrams to answer the following questions. This question considers the relationship between the Indian rupee(R_{s})and the U.S dollar ($). The exchange rate is in rupees per dollar,E_{Rs/\$ }. On all graphs, label the initial equilibrium point A.
Questions are as follows: a. Illustrate how a permanent decrease in India's money supply affects the money and FX markets. Label your short-run equilibrium point B and your long-run equilibrium point C. b. By plotting them on a chart with time on the horizontal axis, illustrate how each of the following variables changes over time (for India): nominal money supply MIN, price level Pin, real money supply MIN/PIN, interest rate irs, and the exchange rate Ers/s. c. Using your previous analysis, state how each of the following variables changes in the short run (increase/decrease/no change): India's interest rate irs, Ers/s, expected exchange rate Ers/s, and price level PIN. d. Using your previous analysis, state how each of the following variables changes in the long run (increase/decrease/no change relative to their initial values at point A): India's interest rate iro, Ers/S, Ers/$, and India's price level PIN. e. Explain how overshooting applies to situation. applies to this
