5.1 This question makes use of the model of prices, interest rates; and exchange rates in Lesson 5 and embodies all of the assumptions and economic principles of that model. Consider an economy which is initially in a longrun equilibrium. There is then a permanent 111% m in the domestic nominal money supply from M1 to M2 = M'. Assume that there are no changes in domestic output (F), the foreign interest rate {R*), or the foreign price level (P*). a} As the economy adjusts from its initial long-mn equilibrium to a new SHELmn equilibrium in response to this permanent decrease in domestic money supply: i] the domestic price level (P) will- . .. .Iis'IEIiset'fall.Ir not change); i) the domestic interest rate {R} will (riseffallt'not change}; iii] the expected exchange rate (E?) will. """"" ' .'(riseffall.u'not change]; iv} the achral exchange rate [E] will - - liflrisetfallfnnt change}. {-11 marks) b} In the spaces below explain WHY each of the following variables will rise: or fall; or not change in the shortrun in response to this permanent decrease in nominal money supply. (4 marks) i) The domestic interest rate [E]: ii} The actual exchange rate [E]: c] Assume that the economy is initially in a longrun equilibrium in which: ff: It'll]; P'i'=1.25; M1: 5i]; R1 = ll!\" = {1405; P' = 2.5!]; E1 = E\": 2.\" Assume that the domestic real money demand function takes the following specic form: Mild} = {1.251if lR, Now suppose that the nominal money supply of this economy undergoes a onetime, permanent decrease from MI: Eli] to M2: 45, wii no changes in F, P'\