1. Assume that Home output Vy is endogenously determined by the goods mar- ket equation. Home money supply My increases by 10% permanently. The real money demand function is in the form [(Rp. Ya] = RH (1) where Ry is the nominal Home interest rate. a) Use a AA-DD diagram to show that undershooting could exist. b) If overshooting occurs, state the range of the possible percentage change in Yw. (That is, find out the maximum and minimum percentage changes of Y's). In part cl below, assume that before the money supply change, Vy is initially at the full employment level VY where VY = 1. The consumption and current ac- count functions are, respectively. C=C+07(Y#- 7) (2) where damp is mal exchange rate of Home per unit of Foreign currency, C is an autonomous consumption, and 7 is a lump-sum tax. cl Suppose that there is no undershooting and no overshooting. Denote as dip fire and dry, the initial, short-run and long-run equilibrium real exchange rates, respectively. Calculate the values of Gigg fifty and AIF