In 2016, the United Kingdom (UK) held a referendum on whether to leave the European Union (EU). Roughly 51.9% of the 33.5 million voters elected to discontinue UK's membership in the EU. The UK is due to leave the EU before midnight on 29 March 2019. Surveys of leading economists show overwhelming agreement that "Brexit" will likely reduce the UK's real per-capita income level.

a. (5 Points) Use a diagram showing the exchange rate, expected cur- rency returns and money holdings to analyze theshort-termeffect of a temporary decrease in national income and on the UK nominal interest rate and on the nominal spot exchange rate of the British pound.

b. (5 Points) What are thelong-termeffects?