International monetary economics

Q4 (24 points) Consider the following short-run model of equilibrium in the foreign exchange market, money market, and goods market. R = R +- E-E E "P = L(R, Y), Y = C(Y - T) + I +G+ CA(#, Y-T). All variables have the interpretation given in class a. (6 points) Imagine that the economy is at a point on the DD-AA diagram that is located below both the AA and DD schedules, where both output and asset markets are out of equilibrium. Explain how equilibrium is restored. (Submit a typed answer, not handwritten. Maximum of 100 words.) b. (12 points) Assume that the economy is at its long-run equilibrium. Suppose that the foreign money supply, M , falls temporarily, thus affecting R" . Explain how the endogenous variables of this model adjust in the short run. (Submit a typed answer, not handwritten. Maximum of 100 words.) c. (6 points) How would your answer to the previous question change if the change in M " was permanent? (Submit a typed answer, not handwritten. Maximum of 75 words.)