Q3. Use the money market and FX diagrams to answer the following questions. This question considers the relationship between the Indian rupee (Rs) and the U.S. dollar ($). The exchange rate is in rupees per dollar,E_Rs/$. On all graphs, label the initial equilibrium pointA.

a. Illustrate how apermanentdecrease in India's money supply affects the money and FX markets. Label your short-run equilibrium pointBand your long-run equilibrium pointC. (1 mark)

b. By plotting them on a chart with time on the horizontal axis, illustrate how each of the following variables changes over time (for India): nominal money supplyM_IN, price levelP_IN, real money supplyM_IN/P_IN, interest ratei_Rs, and the exchange rateE_Rs/$. (1 mark)

c. Using your previous analysis, state how each of the following variables changes in theshort run(increase/decrease/no change): India's interest ratei_Rs,E_Rs/$, expected exchange rateE^e_Rs/$, and price levelP_IN. (1 mark)

d. Using your previous analysis, state how each of the following variables changes in thelong run(increase/decrease/no change relative to their initial values at pointA): India's interest ratei_Rs,E_Rs/$,E^e_Rs/$, and India's price levelP_IN. (1 mark)

e. Explain how overshooting applies to this situation. (1 mark)