Suppose that real money demandtemporarilyfalls.Using diagrams and explanations, show the short-run and long-run effects on the foreign exchange value of the country's currency, the country's interest rate, and the country's price level.

In the discussion of exchange rate overshooting, we assumed that real output (Y) was held constant.Assume instead that an increase in the money supply causes real output to increase in the short run.How does this affect the extent to which the exchange rate overshoots its long-run value when the money supply first increases?Is it possible that the exchange rate undershoots its long-run value?