Consider the following short-run model of equilibrium in the foreign exchange market, money market, and goods market:

?=?

+?

?

?

?

R=R+EeEE,

?

?

?

=?(?,?)

MSP=L(R,Y),

?=?(??)+?+?+jQuery22407758457891049064_1587427512139(??

?

,??)

Y=C(YT)+I+G+CA (EPP,YT).

All variables have the interpretation given in class.

a. (6 points) Imagine that the economy is at a point on the DD-AA diagram that is located below both the AA and DD schedules, where both output and asset markets are out of equilibrium. Explain how equilibrium is restored.

b. (12 points) Assume that the economy is at its long-run equilibrium. Suppose that the foreign money supply,?

?

Ms, falls temporarily, thus affecting?

R. Explain how the endogenous variables of this model adjust in the short run. (Submit a typed answer, not handwritten. Maximum of 100 words.)

c. (6 points) How would your answer to the previous question change if the change in?

?

Mswas permanent?