What happens to the dc-fc exchange rate in both short run

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1. Recently, several regional commercial banks collapse in Foreign, and the collapses trigger fears in the banking and financial markets in both Home and Foreign. In attempt to calm the markets, both countries' central banks increase the required reserve ratios in their respective banking system temporarily? What happens to the DC/FC exchange rate and the domestic real money balance in the short run? Explain with the support of ONE foreign exchange market diagram (only the first diagram will be graded).

2. Suppose Foreign experiences a permanent improvement in payment technology such that the need to hold cash to facilitate transactions drops, what happens to the DC/FC exchange rate in both short run and long run? Explain with the aid of ONE foreign exchange market diagram (only the first diagram will be graded).

Note: DO NOT write "let Foreign be the home country and its currency be DC". Compare your answer to initial long-run equilibrium.

Reference no: EM133543776

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