You are an economist working for the Swiss National Bank (forecasting department). Your task is to evaluate what would happen to the exchange rate between Switzerland and the Eurozone under several scenarios.
Scenario 1: Swiss National Bank decreases money supply (for Switzerland)
Scenario 2: The ECB raises the money supply in the Eurozone
Scenario 3: The ECB decreases the money supply in the Eurozone
Scenario 4: Investors start expecting that Swiss Franc will become more expensive in the future (compared to previous forecast)
Scenario 5: Investors start expecting that Swiss Franc will become cheaper in the future (compared to the previous forecast)
To evaluate each of these cases you need to:
Draw money market diagrams for Switzerland and the Eurozone (plotting real money demand and supply). Depict changes that the shock will trigger.
Find equilibrium interest rates in Switzerland and the Eurozone.
Draw the Forex market diagram (plotting the the Domestic Return and Foreign return curves).
Find equilibrium on the Forex market before and after the change.
Comment on whether the Swiss Franc will appreciate or depreciate