(4 points) Chapter 6, problem 8 (Response to the announcement. Assume the money
supply increase is expected to be permanent.)

Problem 8, chapter 6 - A new government is elected and announces that once it is inaugurated, it will increase the money supply. Use the DD-AA model to study the economy's response to this announcement.

2. (5 points) Country A does not manage its exchange rate.
a) Show the effect of an increase in Country A’s money supply on its output and
on the exchange rate using a graphical analysis. If output changes, explain in
words what causes the change in aggregate demand that brings this about; if
not, explain why not.
Country B maintains a fixed exchange rate with Country A.
b) Show the effect of the change in part (a) on Country B. (Hint: what reaction
must Country A’s policy cause in Country B?)
c) Once the changes in parts (a) and (b) both happen, what is the net effect on
Country A? Explain your answer. (To start, you might assume that Country A
and Country B are the only countries in the world. Then, if you can, expand
your analysis.