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1. (Continuation from Question 1 - please answer using the same graph as in Q1, or draw a new graph containing same information as your Q1 graph). Let B from Q1 part b represent the long run full-employment equilibrium for the money market.

a. Suppose the Brazilian central bank expanded the money supply during the Olympics, announcing that the change would be permanent. Label the point representing the combined short-run effects of the Olympics boom and the monetary expansion on the money market in the graph above with a C. Label the new forex market equilibrium C'. Is the exchange rate E BR/$ associated with C' higher or lower than it would have been if the expansion had been temporary? Explain briefly.

b. In the long run, how do the values of Ms/P and the exchange rate compare to their values at points B and B'? What are the roles of P and R in the adjustment of Ms/P and the exchange rate to their long-run equilibrium values?

Macroeconomics, Economics

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