1) Using Harvey's four quadrant model, illustrate and describe the possible effects on nominal GDP, the exchange rate E, employment N and interest rates r of a tightening of monetary policy in a country.
2) There is overshooting in this model, but it has a different cause to the overshooting described in the Dornbusch Model. What is the main difference?
3) (Where you show the flexibility of this model)
Use the model to illustrate the possible impact of an increase in nominal wages which is not matched by an increase in productivity, where that increase in nominal wages has a greater impact on aggregate supply than on aggregate demand.
Assume the monetary policy curve shifts by enough so that there is a small increase in interest rates, but that expectations of exchange rates shift by enough so that there is a small currency depreciation.
The impact of the increase in labour costs on the real exchange rate is such as to produce a small trade deficit.
Show these events on your diagram.