7.2 The diagram below shows two combinations (labeled A and B) on the AA curve of an economy. E A B AA Y' - 100 = = 150 Y The real demand for money function of this economy is: M /P = L(R, Y) = 0.6Y - 500R Assume the following values for the domestic real money supply (M /P), foreign interest rate (R*), and the expected exchange rate (E ): (M /P) = 50; R* = 0.05; and E' = 2.00. a) Given the information above, and applying the definition of the AA curve, we can calculate that El = while E' = (Round answers to 2 decimal places.) (4 marks) b) As the economy moves down the AA curve from point A to point B the rise in national income from Y to Y- (increases/ decreases) real money (demand/supply) which creates excess (demand for /supply of ) money which results in a(n) (increase/decrease) in the domestic interest rate (R) which (increases/decreases) domestic demand for foreign currency and results in an excess (demand for /supply of ) foreign currency at the initial exchange rate of E' requiring a fall in the exchange rate (E) to restore interest parity and FX market equilibrium. (3 marks) c) Now suppose that the expected exchange rate decreases ($ E*) from its current value of 2.00 with no change in any other exogenous variable. How, and why, does a decrease in E affect the AA curve shown in the diagram above? Explain