Consider two countries: Japan and South Korea. In 1996 Japan experienced relatively slow output growth (1%), while South Korea had relatively robust output growth (5%). Suppose the Bank of Japan allowed the money supply to grow by 1% each year, while the Bank of Korea chose to maintain relatively high money growth of 15% per year. Treat South Korea as the home country and Japan as the foreign country, and use the simple monetary model (with constant L) to answer the following questions: a. What is the inflation rate in South Korea ()? How about 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 10%. What is the new inflation rate in South Korea? d. Using time series diagrams (impulse graphs), illustrate how this decrease in the money growth rate affects South Korea’s nominal money supply MK; prices PK, real money supply, and Ewon/yen over time.

The simple monetary model (also known as the Quantity Theory of Money) assumes that money supply…

Answered: Consider two countries: Japan and South…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Consider two countries: Japan and South Korea. In 1996 Japan experienced relatively slow output growth (1%), while South Korea had relatively robust output growth (5%). Suppose the Bank of Japan allowed the money supply to grow by 1% each year, while the Bank of Korea chose to maintain relatively high money growth of 15% per year. Treat South Korea as the home country and Japan as the foreign country, and use the simple monetary model (with constant L) to answer the following questions:

a. What is the inflation rate in South Korea ()? How about 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 10%. What is the new inflation rate in South Korea?

d. Using time series diagrams (impulse graphs), illustrate how this decrease in the money growth rate affects South Korea’s nominal money supply M_K; prices P_K, real money supply, and E_won/yen over time.

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