Consider the relationship between the Japanese yen (¥) and the U.S. dollar ($). Let the exchange rate be defined as $ per ¥, E = $/¥. Apply the money market – foreign exchange market diagrams to answer the following questions. On all graphs, label the initial equilibrium point A.
1) Illustrate how a temporary decrease in Japan’s money supply affects the money and FX markets. Label your short-run equilibrium point B and your long-run equilibrium point C.
2) Refer to the diagram from (1), state how each of the following variables changes in the short-run (increase/decrease/no change): U.S. interest rate, Japanese interest rate, spot exchange rate E, expected future exchange rate F, and U.S. price level.
3) Refer to the diagram from (1), state how each of the following variables changes in the long run (increase/decrease/no change relative to their initial values at point A): U.S. interest rate, Japanese interest rate, E, F, and U.S. price level.
Consider the relationship between the Japanese yen (¥) and the U.S. dollar ($). Let the exchange rate be defined as $ per ¥, E = $/¥. Apply the money market – foreign exchange market diagrams to answer the following questions. On all graphs, label the initial equilibrium point A.
1) Illustrate how a temporary decrease in Japan’s money supply affects the money and FX markets. Label your short-run equilibrium point B and your long-run equilibrium point C.
2) Refer to the diagram from (1), state how each of the following variables changes in the short-run (increase/decrease/no change): U.S. interest rate, Japanese interest rate, spot exchange rate E, expected future exchange rate F, and U.S. price level.
3) Refer to the diagram from (1), state how each of the following variables changes in the long run (increase/decrease/no change relative to their initial values at point A): U.S. interest rate, Japanese interest rate, E, F, and U.S. price level.
