Answer Happy

At time t=0, R$ =15%, R€=15%, and E$/€ =1.
Assume that Reserve Bank of Australia permanently increases
money supply in Australia by 20% at time t=2.

In addition, assume the following:
The policy change is anticipated at t=1
Prices are fixed in the short run
Prices completely adjust to the change in money supply in the long
run
In the short run, domestic net exports (NX) decrease due to an
increase in E ( due to the J-curve effect).
R€ =15% at t=1 and t=2

Select the most appropriate option:
A.
E$/€ =1.2 and R$ =15% at t=1 and in the long-run; E$/€ >1.2 and
R$<15% at t=2; the $ depreciation in t=2 is less relative
to the case where NX immediately increase due to an increase in
E.
B.
E$/€ =1.2 and R$ =15% at t=1 and in the long-run; E$/€ >1.2 and
R$<15% at t=2; the $ depreciation in t=2 is more relative to the
case where NX immediately increase due to an increase in E.
C.
E$/€ =1.2 and R$ =15% at t=1 and in the long-run; E$/€
>1.2 and R$<15% at t=2; the $ depreciation in t=2 can be more
or less relative to the case where NX immediately increase due to
an increase in E.
D.
E$/€ =1.2 and R$ =15% at t=1 and in the long-run; E$/€
>1.2 and R$<15% at t=2; the $ depreciation in t=2 is the same
relative to the case where NX immediately increase due to an
increase in E.
E.
E$/€ =1.2 and R$ =15% in the long-run; E$/€ >1.2 and R$<15%
at t=1 and t=2; the $ depreciation in t=2 is more relative to the
case where NX immediately increase due to an increase in E.