Use the money market with the general monetary model, and the foreign exchange (FX) market to answer the following questions. The questions consider the relationship between the Australian dollar ($) and the U.K. British pound (pound). In Australia, the real income Y($) is 10.0 trillion, the money supply M($) is $20.0 trillion, the price level P($) is $4.0, and the nominal interest rate i($) is 5.0% per annum. In the U.K., the real income Y(pound) is 20.0 trillion, the money supply M(pound) is 20.0 trillion pounds, the price level P(pound) is 2.0 pounds, and the nominal interest rate i(pound) is 5.0% per annum. Note that the uncovered interest parity (UIP) holds all the time and the purchasing power parity (PPP) holds only in the long run. Assume that the new long-run levels are achieved in 1 year from any permanent changes in the economies.

Now, today at time T, the money supply of the U.K., M(pound), rose by 3.0%, permanently, while the money supply and the real income of Australia, Y($) and M($), and the real income of the U.K, Y(pound), do not change at all.

At time T, the expected foreign return (FR) curve for Australians measured in Australian dollars for investments in the U.K. Answer shifts to the left . (1 mark)

After time T, the expected foreign return (FR) curve for Australians measured in Australian dollars for investments in the U.K. Answer to achieve the new long-run equilibrium. (2 marks)