2. The following questions are about the unified monetary and asset approach to exchange rate determination. Consider to currencies, the $ and the , where the $ is the home currency and the is the foreign currency. a. [5 pts) Draw the home money market and FX market and label the equilibrium point, O. b. [10 pts) Starting from the initial equilibrium in part a., consider the following scenario. Suppose the Federal Reserve decides to permanently decrease the money supply. This action is unanticipated by forex traders. How does this affect the US money market and the forex market? Label the short run equilibrium point A and the long run equilibrium point B. c. [10 pts) Starting from the initial equilibrium in part a., consider the following scenario. Suppose in response to the coronavirus outbreak traders in the FX market expect the Federal Reserve to lower interest rates. How does this affect the US money market and the forex market. Label the short run equilibrium point, A. (Assume no monetary action has been taken) d. [15 pts) Starting from the initial equilibrium in part a., consider the following scenario. In response to the coronavirus outbreak, the Federal Reserve and the Bank of Japan engage in a coordinated policy response. In particular, both central banks decide to lower their interest rates by the same amount. Investors know that this policy response is coordinated. Show these changes in the US money market, Japanese money market, and the forex market. e. [20 pts] Consider a third country, the United Kingdom. The currency of the United Kingdom is the pound, . Suppose the Bank of England wants to maintain a fixed exchange rate between the and the $ and capital mobility. Explain in words what the Bank of England must do to accomplish this goal, and show these changes in the UK money market and the forex market where the fis the domestic currency. 2. The following questions are about the unified monetary and asset approach to exchange rate determination. Consider to currencies, the $ and the , where the $ is the home currency and the is the foreign currency. a. [5 pts) Draw the home money market and FX market and label the equilibrium point, O. b. [10 pts) Starting from the initial equilibrium in part a., consider the following scenario. Suppose the Federal Reserve decides to permanently decrease the money supply. This action is unanticipated by forex traders. How does this affect the US money market and the forex market? Label the short run equilibrium point A and the long run equilibrium point B. c. [10 pts) Starting from the initial equilibrium in part a., consider the following scenario. Suppose in response to the coronavirus outbreak traders in the FX market expect the Federal Reserve to lower interest rates. How does this affect the US money market and the forex market. Label the short run equilibrium point, A. (Assume no monetary action has been taken) d. [15 pts) Starting from the initial equilibrium in part a., consider the following scenario. In response to the coronavirus outbreak, the Federal Reserve and the Bank of Japan engage in a coordinated policy response. In particular, both central banks decide to lower their interest rates by the same amount. Investors know that this policy response is coordinated. Show these changes in the US money market, Japanese money market, and the forex market. e. [20 pts] Consider a third country, the United Kingdom. The currency of the United Kingdom is the pound, . Suppose the Bank of England wants to maintain a fixed exchange rate between the and the $ and capital mobility. Explain in words what the Bank of England must do to accomplish this goal, and show these changes in the UK money market and the forex market where the fis the domestic currency
