1.Traders in asset markets suddenly learn that the interest rate on

euro deposits will decline in the near future. Use a well labelled

graph, show and explain the effect on the current dollar/euro

exchange rate, assuming current interest rates on dollar and euro

deposits do not change

2.With the help of well labelled graphs, explain the effects of a permanent increase in the U.S. money supply in

a) the short run

b) long run

Assume that the U.S. real national income is constant.

c) Explain what you understand by "overshooting" of the exchange

rate? Why is this useful?