Use the money market with the general monetary model and foreign exchange (FX) market to answer the following questions. The questions consider the…

Use the money market with the general monetary model and foreign exchange (FX) market to answer the following questions. The questions consider the relationship between the U.S. dollars (US$) and the Australian dollar (AU$). Let the exchange rate be defined as Australian dollars per 1 U.S. dollar, EAU/US. In the U.S., the real income (YUS) is 1,000, the money supply (MUS) is US$5,000, the price level (PUS) is US$10, and the nominal interest rate (iUS) is 3% per annum. In Australia, the real income (YAU) is 100, the money supply (MAU) is AU$1,000, the price level (PAU) is AU$20, and the nominal interest rate (iAU) is 3% per annum. These two countries have maintained these long-run levels. Thus, the nominal exchange rate (EAU/US) has been 2. Note that the uncovered interest parity holds all the time and the purchasing power parity holds only in the long-run. Assume that the new long-run levels are achieved within 1 year from any permanent changes in the economies.
Now, today at time T, the Federal Reserve Bank of the U.S. (FRB) permanently reduces the money supply (MUS) by 2% so that the new money supply in the U.S. (MUS) becomes US$4,900. With the new money supply, the interest rate in the U.S. rises to 5% per annum today.