Monetary Policy

i. As we have discussed, the Fed has engaged in significant rate cuts in response to COVID-19. Use the left graph below. Ceteris paribus (ignore for the moment the ECB), show the expected effect on the value of the USD/EUR exchange rate under such rate cuts. Provide a brief intuitive description below the graph. ii. Given similar European growth concerns, the ECB is expected to engage in accommodation (they are already doing QE). Copy your results from the left graph and show on the right graph the effect under a scenario where the ECB similarly engages in stimulus. Describe the additional effect on the USD/EUR exchange rate? Provide a brief intuitive description below the graph. iii. At the very bottom, comment very briefly on how the ECB's anticipated policies (under this scenario) might affect U.S. / Euro area trade and U.S. multinationals' earnings. USD/EUR USD/EUR E R1 M1/pi USD Return USD Return Real USD Real USD Money Money Holdings Holdings