Use the money market and FX diagrams from (a) to answer the following questions. This question considers

Question:

Use the money market and FX diagrams from (a) to answer the following questions. This question considers the relationship between the Indian rupees (Rs) and the U.S. dollar ($). The is in rupees per dollar, ERs/$. On all graphs, label the initial equilibrium point A.
a. Illustrate how a permanent increase in India’s money supply affects the money and FX markets. Label your short-run equilibrium point B and your long-run equilibrium point C.
b. By plotting them on a chart with time on the horizontal axis, illustrate how each of the following variables changes over time (for India): nominal money supply MIN, price level PIN, real money supply MIN/PIN, India’s interest rate iRs, and the ERs/$.
c. Using your previous analysis, state how each of the following variables changes in the short run (increase/decrease/no change): India’s interest rate iRs, ERs/$ EeRs/$, and India’s price level PIN.
d. Using your previous analysis, state how each of the following variables changes in the long run (increase/decrease/no change relative to their initial values at point A): India’s interest rate iRs, ERs/$ EeRs/$, India’s price level PIN.
e. Explain how overshooting applies to this situation.
Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...