Consider the monetary approach in the long run and the general model where demand for real balances is a function of the nominal interest rate. Suppose that both domestic and foreign

GDP growth rates are zero, g = g* = 0. Assume that foreign money supply remains constant. Before time T, domestic money supply grows at the rate . At time T, there is an increase in the rate of growth of home money supply M.

How will exchange rate behave in the long run?

Show the paths of the key variables (M, M/P, i, P, E) before time T, at time T, and after time T. Indicate their growth rates.