The effect of trade deficit , quota and fall in imports on the exchange rate

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Chapter 19, Problem 3.6P

To determine

The effect of trade deficit, quota and fall in imports on the exchange rate

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Suppose the exchange rate is flexible. Which of the following best describes how a new equilibrium is established if there is an increase in the use of credit cards? A) The demand for goods increases. Firms respond by increasing output. As output increases demand for money increases. B) The demand for goods increases. Firms respond by increasing output. As output increases demand for money falls. C) The demand for money increases, which reduces interest rates. As interest rates fall demand for goods increase. D) The demand for money falls, which reduces interest rates. As interest rates fall demand for goods increase.

In the context of the monetary approach to the determination of the exchange rate, what is the effect on the price level, interest rate and exchange rate from a permanent contraction in the domestic level of the money supply? how does your previous answer modify if, in addition to the contraction of the level or the growth of the money supply, the relative demand of domestic goods increases?

In the context of the monetary approach to the determination of the exchange rate, what is the effect on the price level, interest rate and exchange rate from a permanent contraction in the domestic level of the money supply? How does your previous answer modify if, instead of the level, it is the domestic growth rate of the money supply that contracts permanently? How do your previous answers modify if we drop the assumption of PPP?