As an analyst at the Treasury Department, you have been asked to predict the behavior of key macroeconomic variables for different scenarios on the state of policy between the US and Europe. Using all the appropriate diagrams, your analysis must describe the complete dynamic behavior of the American and European money markets, as well as the foreign exchange market. To perform this task, you must assume that prices are sticky: fixed in the short-run and flexible in the long-run. The scenarios are:
A temporary restrictive monetary policy in the United States.
A permanent restrictive monetary policy in Europe.