a) Assume that there is new information released today that implies a permanent increase in the domestic output level by 10%, starting in T periods. Explain intuitively in the context of the flexible price, one good, PPP model, with i=i*+E(S/S), why this shock leads to a currency appreciation today. b) Explain intuitively why the exchange rate overshoots in the Dornbusch overshooting model when there is a permanent 10% increase in the money supply.

c) Explain why the forward discount puzzle may be the result of a time-varying risk premium. Specifically, what are the properties of the risk premium to make this work?