Relationship between the euro and the dollar

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Use the money market and FX diagrams to answer the following questions. You may include graphs in your answer if you'd like, but be sure to explain them adequately. Consider the relationship between the euro and the dollar. Suppose there is a ?nancial innovation in the U.S. that decreases real money demand, for any interest rate 71$.

1. Assuming the change in U.S. money demand is temporary, how does this change affect the equilibrium in the U.S. money market and the foreign exchange market, in both the short run and the long run? Consider the implications for 23, Ewe, and the U.S. price level P113.

2. Assuming the change in U.S. money demand is permanent, how does this change affect the equilibrium in the U.S. money market and the foreign exchange market, in both the short run and the long run? Consider the implications for i3, E$/€, and the U.S. price level PUS.

Reference no: EM133067365

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