In the exchange rate model with short-run price stickiness, the nominal interest rate decreases immediately if there is a permanent increase in money supply. However, the model of monetary approach to the exchange rate suggests that the interest rate rises when there is a permanent increase in the growth rate of money supply. Explain how the different assumptions in these two models lead to contrasting predictions about the response of interest rates to the money supply.

Produce/Draw the relevant long-run time paths of the interest rate, price level and nominal exchange rate in each model.