Question 6 Suppose that, due to uncertainty driven by rising inflation, real money demand in the United States goes down. That is, for any given level of interest rate and output, real money demand in the US falls (i.e. a lefttward shift in the money demand schedule). 1. Assume this change in U.S. real money demand is temporary (the economy reverts back to the initial equilibrium in the long run). Using the FX/money market dia- grams, illustrate how this change affects the money and FX markets. Label the initial equilibrium point A, the short-run equilibrium point B, and the long-run equilibrium point C. 2. Assume this change in U.S. real money demand is permanent. Using a new diagram, illustrate how this change affects the money and FX markets. Label the short-run equilibrium point B and the long-run equilibrium point C. 3. Illustrate how each of the following variables changes over time in response to a per- manent decline in real money demand: nominal money supply Mus, price level Pus, real money supply Mus/Pus, U.S. interest rate ius, and the exchange rate E (dollars per foreign currency).