_l 1) 3+2 = 5 points Diagram and explanation required to get full credit a. In the model of the demand and supply of euro assets use a graph to explain how a fall in productivity in Europe accompanied by a decline in European exports because of higher US tariffs affects the equilibrium exchange rate for Euro. b. Assume the price of a Big Mac is $5 in USA and 3 Euros inFrance. Calculate the implied exchange rate between Euro and USD (as Euro/USD). If the actual exchange rate is 0.88 EurosiUSD is the Euro undervalued or overvalued? By how much? Explain. 2) 4 points Assume the free exchange rate for Yuan is 6 yuan per USD. Use a graph to explain how the Chinese central bank will use intervention in the exchange rate market to maintain the value of Yuan at 10 Yuan per USD. What will be the effect on Chinese central bank's holding of international reserves and Monetary Base? Draw the T- accounts for Chinese Central Bank to support your answer. (free market exchange rate is 6 yuan per USD M 0.17 USDtYuanl and Chinese central bank wants to maintain it at 10 yuan per USD [or 0.10 USDtyuanD 3} 3+3= 6 points Diagram(s) and explanation required to get full credit. a. Assume the economy faces a huge demand shock that lands it in the upward sloping segment of Aggregate Demand curve. - Depict this situation on the diagram for AD-AS model. - Explain why theAD demand curve is upward sloping for low levels of ination. b. How can policy makers respond to this shock to help alleviate the recessionary output gap. Give a specic example and show the effect of yoar recommended policy on your diagram. 4) 2+3 = 5 points - Suppose Velocity for M1 depends on interest rate according to V= 200i , where i is the nominal interest rote. a. Using the equation for exchange solve for an expression for Real Demand for money balances (M/P). b. If real interest rate is 3% and expectation of ination is 2%, and Real GDP is 400 calculate: i. Velocity ofMl ii. Demand for Real money balances in this economy