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According to the purchasing power parity​ theory, relative price levels play an important role in determining exchange rates in the​ long-run. Suppose prices have been rising faster in South Korea than in the United​ States, we then predict​ that:

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Refer to the graphs. A decrease in Y from Y1 to Y2 is explained as follows:a)An increase in P from P1 to P2 causes the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2.b)A decrease in P from P2 to P1 causes the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2.c)The Federal Reserve increases the money supply, causing the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2.d)An increase in the price level causes the money-demand curve to shift from MD2 to MD1; this shift of MD causes r to decrease from r2 to r1; and this decrease in r causes Y to decrease from Y1 to Y2.

If the reserve requirement ratio is 15 percent, and banks do not hold excess reserves, and people hold only deposits and no currency, then when the Fed sells $65 million of bonds to the public, bank reserves ___1. decrease by $65 million and the money supply eventually decreases by $433.33 million2. increase by $65 million and the money supply eventually increases by $433.33 million3.decrease by $65 million and the money supply eventually decreases by $266.67 million.4. increase by $65 million and the money supply eventually increases by $266.67 million.

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