Assume the U.S. is the home country. i) Forward guidance. The European Central Bank and the Federal Reserve (US central bank) have announced a future long-term reduction in their money supply of 10% without any change in their stance of monetary policy in the short run. Explain how you expect the exchange rate EUSD/€ to react in the short term to those announcements. Use the appropriate equations to illustrate your explanation. ii) How does your answer change if the Federal Reserve announced instead a permanent monetary reduction of 10%, i.e., a reduction in the US money supply in the short and the long term? Use the appropriate equations and the graphs below to illustrate your explanation.

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