expected exchange rate Ee Rs/$' , and price level PIN- d. Using your previous analysis, state how each of the following variables changes in the long run (increase/decrease/no change relative to their initial values at point A): India's interest rate iRs, the exchange rate ERS/S, the expected exchange rate Ep and India's price level PIN e. Explain how overshooting applies to this situation. Rs/$ 4) Use the money market and FX diagrams to answer the following questions. This question considers the relationship between the euro (€) and the U.S. dollar ($). The exchange rate is in U.S. dollars per euro, Es/e. Suppose that with financial innovation in the United States, real money demand in the United States decreases. On all graphs, label the initial equilibrium point A. a. Assume this change in U.S. real money demand is temporary. Using the FX/money market diagrams, illustrate how this change affects the money and FX markets. Label your short-run equilibrium point B and your long-run equilibrium point C. b. Assume this change in U.S. real money demand is permanent. Using a new diagram, illustrate how this change affects the money and FX markets. Label your short-run equilibrium point B and your long-run equilibrium point C. c. Illustrate how each of the following variables changes over time in response to a permanent reduction in real money demand: nominal money supply Mus, price level real money supply M US/PUS, U.S. interest rate is, and the exchange rate Este PUS 3) Use the money market and FX diagrams to answer the following questions. This question considers the relationship between the Indian rupees (Rs) and the U.S. dollar ($). The exchange rate is in rupees per dollar, ERS/S . On all graphs, label the initial equilibrium point A. a. Illustrate how a permanent decrease 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 MN, 1 price level PN, real money supply MIN/PIN, India's interest rate i̟R, and the exchange rate ERS/S 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 iR, the exchange rate ERS/S