Use the Money Demand / Money supply diagram along with the FX market diagram to demonstrate both the short run and long run impact of a permanent money supply increase by the home country (assume prices are sticky in the short run and output is constant). Label things carefully and explain what happens to money, prices, interest rates, and the exchange rate in both the short run and long run.

b. If you SR E and LR E are not the same, why can't people make money exploiting the fact that they know where the exchange rate is going from SR to LR (or can they?)

c. Label on your graph above what would have happened to the exchange rate in the short run if the money supply increase were temporary. If the outcome is different from the short run impact of a permanent shock, why?