Question 3 (10 points) Consider the relationship between the U.S. dollar ($) and the Norwegian Krone (NOK). The exchange rate is in NOK per U.S. dollar. Suppose that due to improvement in payment technologies in Norway real money demand decreases. On the graphs, the initial equilibrium point is 1 and 1'.

3.1. Assume this change in the real money demand is temporary. Using the FX/money market diagrams below, illustrate how this change affects the money and FX markets. Label your short-run equilibrium points as 2 and your long-run equilibrium points as 3.

Short run: Money Market FX Market Nominal Expected interest returns MS rate, i iNOR DRA iNOR MD, FR 1 F1. Real money Exchange balances, M /HOW rate, ENOKIS Long run: Money Market FX Market Nominal Expected interest returns MS. rate, i INOR DR. iNOR 1 MD, FR Real money Exchange balances, M./PHOR rate, ENOKIS