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8. Consider two countries: Japan and South Korea. In 1996 Japan experienced relatively slow output growth (1%), whereas South Korea had relatively robust output growth (6%). Suppose the Bank of Japan allowed the money supply to grow by 2% each year, while the Bank of Korea chose to maintain relatively high money growth of 15% per year. For the following questions, use the simple monetary model (where L is constant). You will find it easiest to treat South Korea as the home country and Japan as the foreign country. a. What is the inflation rate in South Korea? In Japan? b. What is the expected rate of depreciation in the Korean won relative to the Japanese yen (¥)? c. Suppose the Bank of Korea decreases the money growth rate from 15% to 12%. If nothing in Japan changes, what is the new inflation rate in South Korea? d. Using time series diagrams, illustrate how this increase in the money growth rate affects M PK the money supply K, South Korea's interest rate, prices K, real money supply, and over time. (Plot each variable on the vertical axis and time on the horizontal axis.) Ε. won/¥ e. Suppose the Bank of Korea wants to maintain an exchange rate peg with the Japanese yen. What money growth rate would the Bank of Korea have to choose to keep the value of the won fixed relative to the yen? f. Suppose the Bank of Korea sought to implement policy that would cause the Korean won to appreciate relative to the Japanese yen. What ranges of the money growth rate (assuming positive values) would allow the Bank of Korea to achieve this objective?

8. Consider two countries: Japan and South Korea. In 1996 Japan experienced relatively slow output growth (1%), whereas South Korea had relatively robust output growth (6%). Suppose the Bank of Japan allowed the money supply to grow by 2% each year, while the Bank of Korea chose to maintain relatively high money growth of 15% per year. For the following questions, use the simple monetary model (where L is constant). You will find it easiest to treat South Korea as the home country and Japan as the foreign country. a. What is the inflation rate in South Korea? In Japan? b. What is the expected rate of depreciation in the Korean won relative to the Japanese yen (¥)? c. Suppose the Bank of Korea decreases the money growth rate from 15% to 12%. If nothing in Japan changes, what is the new inflation rate in South Korea? d. Using time series diagrams, illustrate how this increase in the money growth rate affects M PK the money supply K, South Korea's interest rate, prices K, real money supply, and over time. (Plot each variable on the vertical axis and time on the horizontal axis.) Ε. won/¥ e. Suppose the Bank of Korea wants to maintain an exchange rate peg with the Japanese yen. What money growth rate would the Bank of Korea have to choose to keep the value of the won fixed relative to the yen? f. Suppose the Bank of Korea sought to implement policy that would cause the Korean won to appreciate relative to the Japanese yen. What ranges of the money growth rate (assuming positive values) would allow the Bank of Korea to achieve this objective?

Principles of Economics 2e
Principles of Economics 2e
2nd Edition
ISBN:9781947172364
Author:Steven A. Greenlaw; David Shapiro
Publisher:Steven A. Greenlaw; David Shapiro
Chapter29: Exchange Rates And International Capital Flows
Section: Chapter Questions
Problem 8SCQ: A central bank can allow its currency to fall indefinitely, but it cannot allow its currency to rise...
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8. Consider two countries: Japan and South Korea. In 1996 Japan experienced relatively slow output growth (1%), whereas South Korea had relatively robust output growth (6%). Suppose the Bank of Japan allowed the money supply to grow by 2% each year, while the Bank of Korea chose to maintain relatively high money growth of 15% per year. For the following questions, use the simple monetary model (where L is constant). You will find it easiest to treat South Korea as the home country and Japan as the foreign country. a. What is the inflation rate in South Korea? In Japan? b. What is the expected rate of depreciation in the Korean won relative to the Japanese yen (¥)? c. Suppose the Bank of Korea decreases the money growth rate from 15% to 12%. If nothing in Japan changes, what is the new inflation rate in South Korea? d. Using time series diagrams, illustrate how this increase in the money growth rate affects M PK the money supply K, South Korea's interest rate, prices K, real money supply, and over time. (Plot each variable on the vertical axis and time on the horizontal axis.) Ε. won/¥ e. Suppose the Bank of Korea wants to maintain an exchange rate peg with the Japanese yen. What money growth rate would the Bank of Korea have to choose to keep the value of the won fixed relative to the yen? f. Suppose the Bank of Korea sought to implement policy that would cause the Korean won to appreciate relative to the Japanese yen. What ranges of the money growth rate (assuming positive values) would allow the Bank of Korea to achieve this objective?
Transcribed Image Text:8. Consider two countries: Japan and South Korea. In 1996 Japan experienced relatively slow output growth (1%), whereas South Korea had relatively robust output growth (6%). Suppose the Bank of Japan allowed the money supply to grow by 2% each year, while the Bank of Korea chose to maintain relatively high money growth of 15% per year. For the following questions, use the simple monetary model (where L is constant). You will find it easiest to treat South Korea as the home country and Japan as the foreign country. a. What is the inflation rate in South Korea? In Japan? b. What is the expected rate of depreciation in the Korean won relative to the Japanese yen (¥)? c. Suppose the Bank of Korea decreases the money growth rate from 15% to 12%. If nothing in Japan changes, what is the new inflation rate in South Korea? d. Using time series diagrams, illustrate how this increase in the money growth rate affects M PK the money supply K, South Korea's interest rate, prices K, real money supply, and over time. (Plot each variable on the vertical axis and time on the horizontal axis.) Ε. won/¥ e. Suppose the Bank of Korea wants to maintain an exchange rate peg with the Japanese yen. What money growth rate would the Bank of Korea have to choose to keep the value of the won fixed relative to the yen? f. Suppose the Bank of Korea sought to implement policy that would cause the Korean won to appreciate relative to the Japanese yen. What ranges of the money growth rate (assuming positive values) would allow the Bank of Korea to achieve this objective?
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