3. The short run The money market is given by M = 120, i = 0.03, L(i) = 0.2 3i, Y = 32, and P = 34.1. (a) The Fed targets a lower interest rate and to do that, increases the money supply to 185. What interest rate is the Fed targeting? Also, draw a comparative statics graph showing the equilibria before and after. (b) The actions of the Fed have repercussions on the forex market. Knowing the European interest rate of ieu = 3% and the expected spot rate Ee = 1.4, use the UIP to find the equilibrium spot rates before and after. Draw a graph of the forex market and show what changes. (c) What policy is Fed conducting? What is its type, direction, and objective? Is it a short-or long-run thing? = 4. The complete theory of the exchange rate The volume of transactions is Y = 150 goods sold. The price level is ] = 8, nominal money is M = 288. The liquidity preference is L(i) = 0.3 3i, where i = 0.02. The government changes the money to M1 = 324. Also, gus = geu = 0, nus = teu = 0, and at ius ieu = 0.02, E = E= 1.25. (a) First, assume that people do believe that the switch to My 324 is temporary and the interest rate reaches i = 0.01. Find the new exchange rate. Draw the forex market before and after. (b) Now the markets doubt that My = 324 is only temporary. Given that Peu = 6.4, use the PPP in levels to find the expected exchange rate (hint: in the long run, the interest rate will revert back to 2% and the price will have to absorb the effect of M). (c) Find the exchange rate if people think the monetary contraction is here to stay. Show on the forex graph. (d) By how much does the exchange rate overshoot? Show the overshooting on the forex graph 3. The short run The money market is given by M = 120, i = 0.03, L(i) = 0.2 3i, Y = 32, and P = 34.1. (a) The Fed targets a lower interest rate and to do that, increases the money supply to 185. What interest rate is the Fed targeting? Also, draw a comparative statics graph showing the equilibria before and after. (b) The actions of the Fed have repercussions on the forex market. Knowing the European interest rate of ieu = 3% and the expected spot rate Ee = 1.4, use the UIP to find the equilibrium spot rates before and after. Draw a graph of the forex market and show what changes. (c) What policy is Fed conducting? What is its type, direction, and objective? Is it a short-or long-run thing? = 4. The complete theory of the exchange rate The volume of transactions is Y = 150 goods sold. The price level is ] = 8, nominal money is M = 288. The liquidity preference is L(i) = 0.3 3i, where i = 0.02. The government changes the money to M1 = 324. Also, gus = geu = 0, nus = teu = 0, and at ius ieu = 0.02, E = E= 1.25. (a) First, assume that people do believe that the switch to My 324 is temporary and the interest rate reaches i = 0.01. Find the new exchange rate. Draw the forex market before and after. (b) Now the markets doubt that My = 324 is only temporary. Given that Peu = 6.4, use the PPP in levels to find the expected exchange rate (hint: in the long run, the interest rate will revert back to 2% and the price will have to absorb the effect of M). (c) Find the exchange rate if people think the monetary contraction is here to stay. Show on the forex graph. (d) By how much does the exchange rate overshoot? Show the overshooting on the forex graph