b) Using the expected exchange rate and interest rate you calculated in part a), nd the dollar price of a euro (Ewe) consistent with the UIP condition. Now suppose the U.S. money supply falls to 75. Assume that this decrease is permanent such that the FX traders expect USD to appreciate: nge = 1.125. c) What is the new interest rate in the U.S. money market in the short run [i.e., before prices adjust)? d) What is the new equilibrium spot exchange rate in the short run? e) Calculate the percentage change between the new short run spot rate from part d) and the old short run spot rate from part b) i) What is the new equilibrium interest rate in the U.S. money market in the long run [i.e., after prices adjust)? Hint: Your answer should be the same as in part a). g) What is the new equilibrium exchange rate in the long run (i.e., after prices adjust)? Hint: Use the UIP condition, the new exchange rate expectations, and the long run equilibrium interest rate you calculated in part i). h) What is the rate of exchange rate overshooting in the short run? Hint: Calculate the percentage change between the short run spot rate from part d) and the long run spot rate from part g). SR LR ESE/e _ Eye LR Rate of overshooting: E$/e i) Does the spot exchange rate (E$ 1,9) need to rise or fall (i.e., does the U.S. dollar need to depreciate or appreciate against the euro) from the short run to the long run equilibrium? What is an economic intuition behind this result? j) What is the equilibrium exchange rate if the increase in the money supply is transitory (i.e., if exchange rate expectations don't change and the price level does not change)? Problem 4 Suppose U.S. real money demand (Lug) is given by Lus = Lus (Rs: YUS) = 3YUS "100033; where U.S. real income [Yusl U.S. nominal money supply (MUS), the U.S. price level (Pug), the euro area price level (Pew), the interest rate on euro denominated deposits (Re), and the expected USD-EUR exchange rate Ef/e are given by the following table. Yus MUS PUS Pour Re Eire 50 100 1 2/3 0.05 1.50 a) Find the interest rate consistent with equilibrium in the U.S. money market. Hint: Set the real money supply (Mus/Pug) equal to real money demand and solve for R3;. 2