Use the FOREX and money market diagrams to answer the following questions. This question considers the

relationship between the euro (?) and the U.S. dollar ($). Let the exchange rate be defined as U.S. dollars per

euro E$/?. On all graphs, label the initial equilibrium point A. Suppose that with financial innovation in the

U.S., real money demand in the U.S. increases, but U.S. money supply remains unchanged.

2. Money Demand Shock Use the FOREX and money market diagrams to answer the following questions. This question considers the relationship between the euro (6) and the U.S. dollar ($). Let the exchange rate be defined as U.S. dollars per euro Eve. On all graphs, label the initial equilibrium point A. Suppose that with financial innovation in the U.S., real money demand in the U.S. increases, but U.S. money supply remains unchanged. a. Assume this increase in real money demand is temporary. Using the FOREX/money market diagrams, illustrate how this change affects the money and FOREX markets. Label your short-run equilibrium point B and your long-run equilibrium point C. b. Assume instead this increase in real money demand is permanent. Using a new diagram, illustrate how this change affects the money and FOREX markets. Label your short-run equilibrium point B and your long-run equilibrium point C. c. Using time series diagrams, illustrate how each of the following variables changes over time in response to the permanent increase in real money demand: nominal money supply Mus, price level Pus, real money supply Mus/Pus, U.S. interest rate is, and the exchange rate ESE