Answer Happy

3. Strong economic activity in Economia causes an increase in
money demand.
a. Use the money market and FX market diagrams to illustrate the
short-run and the long-run effects of the increase in money demand,
assuming that it is temporary and lasts between time T and
T+5.
b. Use the money market and FX market diagrams to illustrate the
short-run and the long-run effects of the increase in money demand,
assuming that it is permanent.
c. With time on the horizontal axis, show how a temporary and a
permanent increase in money demand affect the nominal interest
rate, real money balances, the price level and the exchange
rate (𝐸𝐸𝑐𝑜𝑛/𝐹).
d. Does a permanent increase in money demand lead to exchange
rate overshooting? What if the shock is temporary?
Explain.