Use the money market and FX diagrams to answer the following questions about the relationship between the U.S. dollar ($) and the euro (e). The exchange rate is in U.S. dollars per euro. Suppose that the real money demand in the United States increases.

Use the money market and FK diagrams to answer the following questions about the rela- tionship between the US. dollar ($1 and the euro (]. The exchange rate is in US. dollars per euro. Suppose that the real money demand in the United States increases. {a} Suppose that the increase in the US. real money demand is temporary [the real money demand curve retums to its original level). Using the FX and money market diagrams, illustrate how this change affects the money and FX markets. Label the initial equilib- rium as point A, label your short-run equilibrium as point B and your long-run equilib- rium as point C. [6 points] {b} Assume this change in US. real money demand is permanent. Using a new diagram. illustrate how this change affects the money and FX markets. Label the initial equilib- rium as point A. label your short-run equilibrium as point B and your long-mn equilib- rium as point C. [8 points] {c} By plotting them on a chart with time on the horizontal axis, illustrate how each of the following variables change over time in response to a permanent increase in the real money demand: nominal money supply Mus, price level PM, real money supply Mffs. U.S. interest rate f3, and the exchange rate Esre- Denote period T. as the period when the real money demand changed1 and clearly show what happens to each of the variables in the long run (Le. if they retum to their initial level or converge to a new one}. (It) points)