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Recently, there are permanent changes in the domestic money market. Domestic money holders increase the fraction of income held in the form of money increases

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Recently, there are permanent changes in the domestic money market. Domestic money holders increase the fraction of income held in the form of money increases by 2 percentage points. At the same time, the central bank of Home lowers its volume of open market purchases and the level of money supply changes by 4%. When the market revises their expectations, the expected change rate (Ee) would change by 0.242 DC per FC. (You need to decide the new levels of money supply and expected exchange rate). b) Find the shortrun equilibrium levels of interest rate in both countries and the DC/FC exchange rate. (8 points) c) Suppose there is a change in monetary policy such that the central bank of Home wants to keep the short-run exchange rate at 1.5500 via a temporary change in money supply. Can the central bank achieve this goal? Explain. (6 points)

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