3. Compare the short and long run effects on the depreciation rate of the domestic currency for the following independent shocks. Expectations are adaptive. (5)

a. The

foreign money growth rate rises. (5)

b. The

price of oil experiences a transitory rise. Assume the domestic economy is more

dependent on oil than the foreign economy. (10)

c. For the

shock in (a) compare short and long run depreciation of the domestic currency

if investors have Rational Expectations.