In the exchange rate model with short-run price stickiness, the nominal interest rate decreases immediately if there is a permanent increase in money supply.

In the exchange rate model with short-run price stickiness, the nominal interest rate decreases immediately if there is a permanent increase in money supply. However, the model of monetary approach to the exchange rate suggests that the interest rate rises when there is a permanent increase in the growth rate of money supply. Explain how the different assumptions in these two models lead to contrasting predictions about the response of interest rates to the money supply. Show the relevant long-run time paths of the interest rate, price level and nominal exchange rate in each model. (8 mark)

 2. Analyze the effects of a temporary increase in the European money supply on the dollar/euro exchange rate using both the Australian money market and the foreign exchange market. Explain. (4 marks)

 3. Discuss the short run and the long run effect of a permanent exogenous decrease in foreign money demand on the domestic money market and the foreign exchange market. (8 marks)

 Notes • All assignments are to be submitted online in the area provided in DSO. They are counted as ‘on time’ if submitted by 11:59pm AEST or AEDST on the due date. If necessary, you can look up your local time at http://www.whitepages.com.au/wp/helpfulInfo.do?category=info&item=worldTime. When submitting online, you must check that you have submitted work correctly by following the instructions provided in DSO.

The following marking penalties will apply if you submit an assessment task after the due date without an approved extension: 5% will be deducted from available marks for each day up to five days, and work that is submitted more than five days after the due date will not be marked. The late penalty is therefore calculated as follows:

 1 day late. Submitted after [Time, date but before Time, Date]. Penalty 5/100 (0.01 to 23.59 hours after due time and date, shown in hours on Cloud Deakin Drop Box)

 2 days late. Submitted [Time, date but before Time, Date]. Penalty 10/100 (24-47.59 hours after due time and date, shown as 1 day on Cloud Deakin Drop Box)

3 days late. Submitted after [Time, date but before Time, Date]. Penalty 15/100 (48-71.59 hours after due time and date, shown as 2 days on Cloud Deakin Drop Box)

4 days late. Submitted after [Time, date but before Time, Date]. Penalty 20/100 (shown as 3 days on Cloud Deakin Drop Box) 5 days late. Submitted after [Time, date but before Time, Date]. Penalty 25/100. (shown as 4 days on cloud Deakin Drop Box)  

 For more information about academic misconduct, special consideration, extensions, and assessment feedback, please refer to the document Your rights and responsibilities as a student in this Unit in the first folder next to the Unit Guide of the Resources area in the CloudDeakin unit site.

Building evidence of your experiences, skills and knowledge (Portfolio) – Building a portfolio that evidences your skills, knowledge and experience will provide you with a valuable tool to help you prepare for interviews and to showcase to potential employers. There are a number of tools that you can use to build a portfolio. You are provided with cloud space through OneDrive, or through the Portfolio tool in the Cloud Unit Site, but you can use any storage repository system that you like. Remember that a Portfolio is YOUR tool. You should be able to store your assessment work, reflections, achievements and artefacts in YOUR Portfolio. Once you have completed this assessment piece, add it to your personal Portfolio to use and showcase your learning later, when applying for jobs, or further studies. Curate your work by adding meaningful tags to your artefacts that describe what the artefact represents.

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