Q2. Suppose that prices cannot change, which is reasonable in the short run. Also assume that expected future exchange rates never change. Y is also assumed to be fixed.

1. Suppose that the Fed increases (decreases) money supply. How does this change affect both markets? Find the new equilibria in both markets and compare them with the old ones, using the graph you draw in Q1.
2. Suppose that the European central bank increases (decreases) money supply. How does this change affect both markets? Find the new equilibria in both markets and compare them with the old ones, using the graph you draw in Q1.