a) With reference to the four quadrant diagram, explain in your own words the short and long run effects of an (unanticipated) monetary expansion on exchange rates; interest rates; the price level; the trade balance; output and employment, within the Dornbusch Model.
b) Central banks often provide guidance regarding likely future changes in monetary policy. In the Dornbusch Model, this equates to announcing today that there will be an increase in the money supply in, for example, three months from now.
Given that exchange rates can only move discontinuously in this model as a consequence of genuinely new information being available to rational currency traders, and that a pre-announced and so anticipated monetary expansion is not genuinely new information, what difference do you suppose the pre-announcement of a monetary expansion will make to your answer in part a)?
(Have a good think about part b), and do your best to work it out).