Use the FX and money market diagrams to answer the following questions. This exercise considers the relationship between the Japanese yen (¥) and U.S. dollar ($). Let the exchange rate be defined as $ per ¥, E_$/¥ .On all graphs, label the initial equilibrium point A.

a. Illustrate how a temporary decrease in Japan’s money supply affects the money and FX markets. Label your short-run equilibrium point B and your long-run equilibrium point C.

b. Using your diagram from (a), state how each of the following variables changes in the short run (increase/decrease/no change): U.S. interest rate, Japanese interest rate, E_$/¥,E^e_$/¥, and U.S. price level.

c. Using your diagram from (a), state how each of the following variables changes in the long run.