Consider the relationship between the Japanese yen () and U.S. dollar ($). Let the exchange rate be defined as $ per , E$/. Apply the money market-foreign exchange market diagrams to answer the following questions. On all graphs, label the initial equilibrium point A.

1. Suppose the decrease in Japan's money supply isconsidered as permanent and monetary policy is credible. Would the exchange rate overshoot in the short run? Apply the money market-foreign exchange market diagram to analyzing the short-run exchange rate equilibrium and long-run adjustments of Japanese price level and exchange rate.