4. (Integrated Short-run and Long-run approaches) Use money market and FX diagrams [an example is figure 15-7 in the textbook] to answer the following questions about the dollar-pound exchange rate E$/. How does a change in money supply affect interest rates and exchange rates? On all graphs, label the initial equilibrium point "A". (a) Illustrate how a temporary decrease in the U.S. money supply affects the money and FX markets. Label the short-run equilibrium point "B". [Hint: Just focus on the short-run here as expected depreciation won't change, also prices are sticky in this case] (b) Now illustrate how a permanent decrease in the U.S. money supply affects the money and FX markets. Label the long-run equilibrium point "B". [Hint: in the long-run prices are flexible] 4. (Integrated Short-run and Long-run approaches) Use money market and FX diagrams [an example is figure 15-7 in the textbook] to answer the following questions about the dollar-pound exchange rate E$/. How does a change in money supply affect interest rates and exchange rates? On all graphs, label the initial equilibrium point "A". (a) Illustrate how a temporary decrease in the U.S. money supply affects the money and FX markets. Label the short-run equilibrium point "B". [Hint: Just focus on the short-run here as expected depreciation won't change, also prices are sticky in this case] (b) Now illustrate how a permanent decrease in the U.S. money supply affects the money and FX markets. Label the long-run equilibrium point "B". [Hint: in the long-run prices are flexible]