e) You have shown and explained how this permanent decrease in money supply will cause a change in the short-run equilibrium exchange rate. Other things being equal, this short-run change in the exchange rate (E) causes domestic goods to be (overpriced/underpriced) relative to foreign goods, resulting in a(n) "increase/ decrease) in the domestic current account balance. The resulting excess (demand for /supply of) domestic output leads in the long run to a (rise/fall) in the domestic price level. This change in the domestic price level, in turn, causes a(n) (increase/decrease) in real money (demand/supply) resulting in a (rise/fall) in the domestic interest rate from its short-run equilibrium level to its long-run equilibrium level and a consequent (rise/fall) in the exchange rate from its short-run equilibrium level to its long-run equilibrium level. (4 marks) f) In the new long-run equilibrium, the new long-run equilibrium price level (P) of the economy will equal and the new long-run equilibrium exchange rate (E) will equal (2 marks) THE END