Effect of monetary policy on the USD/Euro exchange rate.
i. To deal with the various challenges facing the U.S. economy, the FOMC has employed aggressive monetary policy. Ceteris paribus, show the effect on the USD/Euro exchange rate from this policy change. Use the left graph below. Provide an intuitive description below the graph. Also, comment on what impact this would have on the U.S. export-import situation vis-a-vis trading partners?
ii. Now, assume the ECB also employs comparably aggressive policy. Copy your results from the left graph and show on the right graph how the ECB could affect the USD/EUR exchange rate. After all this, will the dollar be weaker or stronger relative to E1? Provide an intuitive description below the graph.
iii. Where are current policy rates in the U.S. and Europe? Elucidate how further active policy may fit into the current graphical setup given the state of current policy.
iv. Over the long-run, how would these policies affect inflation across the two regions if they became permanent? How would these policies affect long-run economic growth? One sentence for each is sufficient.