The first picture:

This picture mainly shows the reaction and mutual influence of two markets-domestic money market (also known as Home Money Market) and foreign exchange market (FX market) when the money supply (MS) changes.

(a) domestic money market

Relationship between money supply and interest rate:

Part (a) in the picture shows that when the money supply (MS) increases in the domestic money market, the domestic interest rate (rN) will decrease. This is because the increase of money supply makes the funds in the market more abundant, and the borrowing cost decreases, which leads to the decline of interest rates.

The "expected return (MS) decreases with the increase of interest rate" mentioned here may be misleading or simplified, because the relationship between expected return and interest rate is not directly determined by money supply, but is determined by the future cash flow of investment projects and the discount rate (interest rate) * * *. But in this picture, our main concern is the direct impact of money supply on interest rates.

stability of real income (MD):

The picture shows that although the change of money supply has affected interest rates, the real income (MD) of the domestic money market has not been affected. The actual income here may refer to the actual purchasing power or value of money or financial assets held by people, which may fluctuate due to inflation, commodity price changes and other factors, but it is simplified as not directly affected by the money supply in this figure.

(b) Foreign exchange market

Money supply and expected return in foreign exchange market:

In foreign exchange market, the increase of money supply reduces the expected return (MS) in foreign exchange market. The "expected return" here may refer to the expected rate of return that foreign investors can get by holding their own currency or assets. Due to the increase of money supply, the purchasing power of domestic currency has decreased relatively, thus reducing the attractiveness of foreign investors to hold domestic assets.

Exchange rate fluctuation and currency depreciation:

The foreign exchange market is also affected by exchange rate fluctuation. When the domestic money supply increases, due to the increase of the domestic money supply in the market, the value relative to foreign money will decrease, that is, currency depreciation (DR). This devaluation not only affects the purchasing power of domestic currency in the international market, but also may trigger a series of economic and financial reactions, such as the deterioration of terms of trade and capital outflow.

decline in real income (DR):

As mentioned in the picture, the real income (DR) in the foreign exchange market has also declined. The actual income here may refer to the net income obtained by foreign investors after considering exchange rate changes. Due to the devaluation of the currency, the amount that foreign investors can get when converting their own currency back into their own currency is reduced, thus reducing their actual income.

the second picture:

(a) Home Money Market

increase in money supply (MS):

when the money supply in China increases, the amount of money circulating in the market increases, resulting in lower borrowing costs.

this directly leads to the decline of * * interest rate (RR)**, because the funds become more abundant and the interest that borrowers need to pay is reduced.

however, * * expected rate of return (EPR)** remains unchanged, which may be because the market expectation has taken into account the change of money supply, or the expected rate of return is greatly influenced by other factors (such as economic growth and investment risks).

Market balance:

Despite the increase of money supply and the decrease of interest rate, the overall balance of domestic money market (that is, the balance between money demand and supply) remains unchanged. This is because the automatic adjustment mechanism of the money market is at work, including investors' adjustment of asset portfolio, enterprises and individuals' adjustment of lending behavior, etc.

(b) FX Market

Foreign countries temporarily increase the money supply:

When foreign countries (such as the euro zone) temporarily increase the money supply, it will directly affect the economy of the euro zone.

the increase of money supply in the euro zone will lead to the decrease of interest rate in the euro zone, because the increase of money supply will reduce the borrowing cost.

Exchange rate changes:

At the same time, the increase of foreign currency supply makes the supply of foreign currency (such as euro) increase relative to domestic currency (such as US dollar).

this usually leads to the depreciation of foreign currency and the appreciation of domestic currency, but the text in the picture refers to "dollar to appreciate", which seems to be contrary to the conventional economic theory. However, this may be due to specific market conditions or policy intervention.

but from the perspective of economics, the increase of foreign money supply is more likely to lead to the depreciation of foreign currency than the appreciation of local currency. Therefore, "dollar to compliment" here may be a special case or a hypothetical situation.

expected rate of return and exchange rate:

The equations and relationships mentioned in the picture (such as the ratio of money supply to money demand and the relationship between exchange rate and expected rate of return) are the key to understanding the dynamics of the foreign exchange market.

these relationships show that the changes in the foreign exchange market are not only affected by the money supply, but also influenced by many factors such as market expectations, investor behavior, policy intervention and so on.

The third picture:

Overall overview

This picture shows the impact on the money market and foreign exchange market in the short term when the US money supply (MS) is expected to increase permanently. Through two sub-graphs (a) and (b), the reactions of short-term Money Market and foreign exchange market are described respectively.

Short-term money market

It is expected that the money supply in the United States will rise permanently: this expectation will lead to a decrease in the demand for money in the market, because people expect more money to circulate in the future.

Decline of domestic rate of return: Due to the increase of money supply, funds become relatively abundant, which reduces the borrowing cost, that is, the domestic rate of return (such as interest rate) decreases.

interest rate decrease: the decrease of domestic rate of return directly leads to the decrease of nominal interest rate. This is reflected in the market, which is manifested in the reduction of borrowing costs and the increase of capital supply.

Short-term foreign exchange market (FX Market)

The impact of the permanent rise of the US money supply: This change not only affects the domestic market, but also affects the international market through the foreign exchange market. When foreign investors see the increase in the US money supply, they may expect the US currency (such as the US dollar) to depreciate.

increase in foreign money supply: although the reasons for the increase in foreign money supply are not directly explained in the picture, it can be inferred that this is a reaction of the market to the increase in American money supply. Foreign countries may adopt corresponding monetary policies or market forces to promote the increase of their money supply in order to maintain exchange rate stability or cope with other economic factors.

exchange rate decline: as the market expects the US currency to depreciate, this will lead to a decline in the exchange rate (that is, the depreciation of the US dollar). The falling exchange rate made foreign currencies appreciate against the US dollar.

Overshoot phenomenon: the "overshoot" mentioned in the picture means that the exchange rate may be excessively adjusted in the short term, that is, the fluctuation range of the exchange rate exceeds the long-term equilibrium level. This is usually due to the expected overreaction or information asymmetry in the market.

The fourth picture:

This picture discusses the response of two markets-domestic money market and foreign exchange market-to the persistent increase of money supply in the long run. It analyzes the changes of key economic variables such as price level, expected future interest rate, exchange rate and real money balance.

long run: money market

persistent increase in money supply:

It is pointed out in the figure that the domestic money supply (MS) has increased persistently. This means that the central bank injected more money into the economy through monetary policy means (such as buying government bonds and reducing the deposit reserve ratio).

Price level rise:

In the long run, with the increase of money supply, the price level (P) will rise. This is because more money is chasing relatively limited goods and services, which leads to a general rise in prices, that is, inflation.

Interest rate returns to the original level:

Although the interest rate may be lowered at the initial stage when the money supply increases (because there are more funds), in the long run, with the rise of the price level, the real interest rate (that is, the nominal interest rate minus the inflation rate) will return to its original level. This is because the economic system will automatically adjust to restore equilibrium.

Decrease in real money balance:

As the price level rises, the purchasing power of money decreases, so the real money balance (MD/P, that is, the real money balance) will decrease. This means that the real value of money held by people has decreased.

foreign exchange market (Long Run: FX Market)

Expected future exchange rate:

It is mentioned in the figure that although the foreign interest rate (FR) is expected to remain at a high level, the foreign exchange market will eventually adjust to reflect the new economic reality.

USD exchange rate rise:

In the long run, the exchange rate of USD against other currencies (E/P*, where P* is foreign price level) will rise, that is, USD will appreciate. This may be because foreign economies have also been affected by a similar increase in money supply, but to a lesser extent, or foreign economies are relatively weak, leading to the depreciation of foreign currencies.

Real rate of return:

Although the foreign interest rate (FR) is still high in name, the real rate of return (DR) of the US dollar will eventually return to its original level due to exchange rate changes and inflation. This means that after considering the exchange rate risk and inflation factors, the actual return on investment at home and abroad is equal.