5 Short-Run and Long-Run FXUse the money market and FX graphs to answer the following questions. The US is the home country, and Britain is the foreign country (E = $/£). The question concerns the short-run and long- run effects of a temporary decrease in the US money supply.a. Show how a temporary decrease in the US money supply affects the money and FX markets. Use point A to label the initial equilibrium, and usepoints B and C to label the short-run and long-run equilibria, respectively.b. Explain how each of the following variables changes in the short run(increase, decrease, or remain constant?): iUS, iBR, E, Ee, and P.c. Explain how each of the following variables changes in the long run(increase, decrease, or remain constant, relative to point A): iUS, iBR, E, Ee,and P.
