Understood to be permanent by the financial community

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Consider the exchange rate between British pounds and European euros. Treat the pound as the base currency, and the euro as the counter currency. Use diagrams of the money market and foreign exchange market (interest parity) to explain the short-run and long-run effects of the following:

(a) a permanent increase in the European money supply that is understood to be permanent by the financial community;

(b) An increase in the European money supply that the financial community believes to be temporary, but is actually permanent; and

(c) an announcement by the European Central Bank that it intends to permanently increase the money supply, but does not actually implement the policy (however the financial community believes the announcement). Treat each case separately.

Reference no: EM132460978

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