Suppose that the money demand function is 1; = 2V lift. The foreign interest rate is i'=.5, and the price level at heme and in the foreign country is initially l1"J = P; = 1. a} Assuming that the PPP holds in the long run and prices are expected to stay constant. what is the expected spot exchange rate? b} Assume that output is 1r = 5 and money supply ME = 9. |Git-'en your answer in part: {a} nd the equilibrium interest rate and the spot exchange rate. Is the domestic currency expected to depreciate or appreciate? c} Suppose that the domestic central bank increases the money supply to M15 = as. i. What is the new equilibrium interest rate? Assuming that exchange rate expectations do not change [equal to what you found in part (a)] what would be the spot exchange rate? ii. Assume that the increase in the money supply is permanent. This should affect exchange rate expectations. Find the long run level of exchange rate expectations. [Hint: money is neutral in the long run and PPP holds]; iii. Find the spot exchange rate using your answers in parts (cii and (cii). Is the exchange rate oyershooting