2.Use the money market and FX diagrams to answer the following questions. This question considers the relationship between the Indian rupees (Rs) and the U.S. dollar ($). Theexchange rate is in rupees per dollar. On all graphs, label the initial equilibrium point

a.Illustrate how a permanent decrease in India's money supply affects the money and FX markets. Label your short-run equilibrium point B and your long-run equilibrium point C.

b.By plotting them on a chart with time on the horizontal axis, illustrate how each of the following variables changes over time (for India): nominal money supply, price level, real money supply, India's interest rate and the exchange rate.

c.Explain how overshooting applies to this situation.