This question is about the short-run asset market model that determines the domestic interest and exchange rates. Suppose that domestic output is constant and exogenously given. Take the US to be the home country, Rest of the World (ROW) to be the foreign country. Think of the nominal exchange rate as a multilateral exchange rate for the US dollar. The US economy is in long-run equilibrium when the Fed unexpectedly, and permanently, lowers money supply. Money growth before and after the policy change is zero. 1. This policy shock will 0 Lower the public's expectation of future exchange rate because prices are expected to go down. 0 Lower the public's expectation of future exchange rate because prices are expected to go down because the long-run interest rate will increase. 0 Leave public's expectation of the future exchange rate unchanged. 0 Increase the expected exchange rate because of higher money demand. 2. Following the shock, the new long-run equilibrium in the money market will be: 0 Higher than the original equilibrium 0 Lower than the original equilibrium 0 Unchanged 0 We cannot tell 3. Following the shock, long-run foreign returns will be: 0 Lower than initially, for every level of the exchange rate 0 Higher than initially, for every level of the exchange rate Q Unchanged 0 None of the above Fill in the blank in the context above. Use the following words: stabilize, overshoot, increase, above, below, drop, rise, increase, previous, new, prior. 4. In the short run, the exchange rate will and discontinuously its long run equilibrium level. As prices begin to , the exchange rate will slowly return to its long-run equilibrium