1. Why is the monetary approach suitable to explain exchange rate behavior in the long-run, but not in the short-run? Why is the asset approach more suitable in the short-run?
2. Suppose that the Fed increased its domestic money supply, which led to a decline in short-run domestic interest rates in the US. Explain the effect of this action on the value of the dollar against the Euro (foreign currency) using the DR-FR graph.
To get full credit here, you need to explain the rationale, and show on the graph.