Suppose that instead of persisting as is assumed in problem 2, the decline in the real exchange rate is only temporary in that after the initial change in the price level that you found in part c of problem 2, aggregate demand returns to its original level.
(a) Given that monetary policymakers, firms, and workers all recognize that the decline in the real exchange rate is only temporary and given the three policy responses described in part d of problem 2, again calculate what the long-run equilibrium price level is and what the expected price level is under each response by monetary policymakers. Again calculate by how much monetary policymakers must change the nominal money supply for the expectations of firms and workers to be realized.
(b) Compare your answers to part d of problem 2 with those of part a of this problem and explain why they are different.
(c) Explain what data or other factors that monetary policymakers, firms, and workers might analyze in attempting to determine if the decline in the real exchange rate is temporary or will persist. Finally, suppose that monetary policymakers are better able than firms and workers to determine if a change in the real exchange rate is temporary or will persist and that firms and workers know this. Given your answer to part d of problem 2 and part a of this problem, explain how once monetary policymakers have determined whether the change in the real exchange rate is only temporary or will persist, they could signal their finding to firms and workers.