Use the FX and money market diagrams to answer the following questions. This question considers the relationship between Swedish kronor (SEK) and Danish krone (DKK). Let the exchange rate be defined as Swedish kronor per Danish krone. On all graphs, label the initial equilibrium point A. Suppose that there is an economic boom in Sweden, leading to an increase in real money demand in that country.
(a) Assume this change in real money demand is temporary. Using the FX and money market diagrams, illustrate how this change affects the money and FX markets. Label your shortrun equilibrium point B and your long-run equilibrium point C.
(b) Assume this change in real money demand is permanent. Using a new diagram, illustrate how this change affects the money and FX markets. Label your short-run equilibrium point B and your long-run equilibrium point C.