7.2 The diagram below shows two combinations (labeled A and B) on the AA curve of an economy. The real demand for money function of this economy is: Md/P = L(R,Y) = 0.6Y 500R Assume the following values for the domestic real money supply (MS/P), foreign interest rate (R*), and the expected exchange rate (Ee): (MS/P) = 50; R* = 0.05; and Ee = 2.00. a) Given the information above, and applying the definition of the AA curve, we can calculate that E1 = __ while E2 = __. (Round answers to 2 decimal places.) (4 marks) b) As the economy moves down the AA curve from point A to point B the rise in national income from Y1 to Y2 ____________ (increases/ decreases) real money ___________ (demand/supply) which creates excess _________________(demand for /supply of ) money which results in a(n) _____________ (increase/decrease) in the domestic interest rate (R) which ____________ (increases/decreases) domestic demand for foreign currency and results in an excess _______________ (demand for /supply of ) foreign currency at the initial exchange rate of E1 requiring a fall in the exchange rate (E) to restore interest parity and FX market equilibrium. (3 marks) c) Now suppose that the expected exchange rate decreases (Ee) from its current value of 2.00 with no change in any other exogenous variable. How, and why, does a decrease in Ee affect the AA curve shown in the diagram above? Explain. (3 marks).