3. The following Figure shows the adjustment of the dollar/euro exchange rate following a permanent increase in the U.S. money supply. It shows both the short-run and long-run effects of this increase in the U.S. money supply. Dollar/euro exchange rate. Es Dollar return Dollar return ESC 3 3 Expected euro return Expected euro return ES O RE Rates of return in 0 dollar terms) R Mis Mus LIR. Yus LIR. Yus) 1 P 1 Pls MGS PN 4 U.S. real money supply Mis 2 PNS U.S. real money holdingo (a) Short-run effects U.S. real money holdingo (b) Adjustment to long-run equilibrium Please draw the time paths of the following variables after a permanent increase in the U.S. money supply: (a) U.S. money supply; (b) Dollar interest rate; (c) U.S. price level; (d) Dollar/Euro exchange rate. (You can find the answer in the lecture slides) Which time path describes the phenomenon of Exchange Rate Overshooting? Why there is overshooting in the short-run? Is it related to the short-run rigidity of the price level? (Please read the attached Textbook from Page 374 to Page 378 for this question)