Question: Question 1. This problem considers how the foreign exchange market will respond to changes in monetary policy. For these questions, define the exchange rate as

respond to changes in monetary policy. For these questions, define the exchange

rate as British pounds ({) per euro, Etc. In other words, U.K.

is the home country. Use the FX and money market diagrams to

answer all questions.:1. Suppose the European Central Bank (ECB) permanently increases its

moneyr supply. Illustrate the shortrun (label the equilibrium point B) and longrun

$effects (label the equilibrium point C) of this policy. (2 points) \fb.$

Suppose the ECB permanently increases its money supply, but investors believe the

change is temporary. That is, investors don't adjust their expected exchange rate

Question 1. This problem considers how the foreign exchange market will respond to changes in monetary policy. For these questions, define the exchange rate as British pounds ({) per euro, Etc. In other words, U.K. is the home country. Use the FX and money market diagrams to answer all questions.:1. Suppose the European Central Bank (ECB) permanently increases its moneyr supply. Illustrate the shortrun (label the equilibrium point B) and longrun effects (label the equilibrium point C) of this policy. (2 points) \fb. Suppose the ECB permanently increases its money supply, but investors believe the change is temporary. That is, investors don't adjust their expected exchange rate because they believe the policy will be reversed before prices adjust. Describe how this situation would affect the spot exchange rate compared with (a). (1 point) \f1:. Finally? suppose the ECB announces its plans to permanently increase the money supply, but doesn't actually implement such a. policy. How will this affect the FX market in the short run if investors believe the ECB's announcement? (1 point)

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9. What is meant by the statement, the context is only relevant to us if we understand what it is trying to say?

7. What does it mean when we say that the words we use to denote a situation set limits on the solutions we can create at a later point?

8. Give examples from your own everyday life that the reference point you use has significance for the actions you take.