1. The European Central Bank (ECB) aims to decrease the risk-free interest rate in Europe by 4%, from roughly 3% to about 1%, for the next 2 to 3 weeks or so. (Note that this is a temporary, short-term change that will last substantially less than one year.)
2. (a)(5pt) How will the ECB implement this change in the Euro (e) interest rate? Draw a diagram of the market in which the ECB will intervene in order to implement this policy.
3. (b)(10pt) Work out the consequences of this ECB policy for the Dollars-per-Euro nominal ex- change rate and for the interest rate in the US. Use the main, two-qudrant diagram devel- oped in class to support your answers. Assume that the US Federal Reserve ("the Fed") does not alter its policies in response to the ECB's actions.
4. (c)(10pt)WhatcantheFeddotopreventanychanceintheDollars-per-Euronominalexchange rate following the ECB's actions? What would be the consequences of such a Fed reaction for the US interest rate? Be as precise as possible.

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a The ECB can implement this change in the Euro interest rate by conducting open market operations s... View the full answer