Question
Plot the combined FX-money market diagram with the U.S. as home and the euro area as foreign. Be sure to label all axes, and to
Plot the combined FX-money market diagram with the U.S. as home and the euro area as foreign. Be sure to label all axes, and to clearly denote the domestic money supply and money demand, the domestic interest rate, and the expected returns curve on foreign currency. For each of the following monetary shocks, plot the response in the domestic money market as well as the impact on the nominal spot exchange rate. Please explain an economic intuition about how the nominal spot exchange rate changes in each scenario. a) Temporary domestic monetary stimulus. b) Temporary foreign monetary contraction. c) Permanent domestic monetary contraction. d) Permanent foreign monetary stimulus.
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