QUESTION 2: Using figure below, show both the short-run and the long-run the effects of a permanent increase in the money supply in Mexico. Try to line up your figures to the short and long run equilibria side by side. Briefly explain below the short-run and long-run adjustments. Consider Mexico as the domestic economy and the U.S. as the foreign country. Assume that the Mexican real output (income) is constant and there is no change in the U.S. monetary policy. Don't forget to label the axis. You may want to use the following notation: $M^{MX}$: Mexican money supply $P^{MX}$: Mexican price level $Y^{MX}$: Mexican real output (income) $R^{MX\$}$: Mexican peso interest rate $R^{US}$: Dollar interest rate $E^{MX\$/S}$: Mexican peso/dollar exchange rate $E^{e MX\$/S}$: Expected future Mexican peso/dollar exchange rate Figures for Question 2 (a) Short-Run Effects (b) Long-Run Effects Foreign exchange market Foreign exchange market Money market Money market
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We'll start with the short-run effects and then move to the long-run effects of a permanent increase in the Mexican money supply. We'll consider the foreign exchange market and the money market for both periods. ### Short-Run Effects #### Show more…
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