In our discussion of short-run exchange rate overshooting, we assumed real output was fixed. Assume instead that an increase in the money supply raises real output in the short run.

Explain with the help of a figure, the transition to long run equilibrium if the exchange rate undershoots relative to its long run value. (please insert the figure)

Note 1: Undershooting is when the spot exchange rate in the short run ESR!" is less than the exchange rate in the long-run ELR#". Note 2: Answer parts assuming an increase in money supply.