10 Suppose the following: a floating exchange rate, sticky prices, the nominal money supply is initially at a constant level, the economy is initially in long-run equilibrium, and national income is constant and is unaffected by any money market activity. Now consider what happens when the central bank sells domestic bonds, thereby decreasing its holdings of domestic bonds. This activity is publicly announced but is unexpected in the financial markets. The central bank also announces at the same time that it has no plans to reverse this activity, so the central bank's decrease in holdings of domestic bonds should be considered permanent. Use a diagram that displays forex-market equilibrium (UIP) on the left side and money-market equilibrium on the right to answer the following (you do not need to show the diagram but you do need to write in words what happens on it). a) Indicate any movement of curves or lines that can be observed in the short run as a result of this activity, and explain the movement(s). b) What happens in the short run to the domestic interest rate, R, as a result. Why? c) What happens in the short run to the exchange rate, E. Why? d) Indicate any movement of curves or lines between the short-run and the long-run, and provide an explanation for the movement(s). e) What happens to the domestic interest rate, R, and the exchange rate, E, between the short run and the long run? Explain. f) How does the movement from the initial exchange rate to the short-run equilibrium exchange rate (as indicated in part c) compare to the movement from the initial exchange rate to the long- run equilibrium exchange rate?