Japan and the United States are major trading partners and the exchange rate between the Japanese yen and the United States dollar is determined in a flexible foreign exchange market. (c) Assume instead household savings increased in the United States. Draw a correctly labeled graph of the loanable funds market in the United States, and show the effect of the increase in household savings on the equilibrium real interest rate. (d) Based on the change in the equilibrium real interest rate identified in part (c), what will happen to financial capital flows to the United States? (e) Based on your answer to part (d), what will happen to the international value of the dollar in the foreign exchange market? Explain. (f) Based on your answer to part (e), will the Federal Reserve buy or sell yen in the foreign exchange market to stabilize the dollar/yen exchange rate? Explain. ONLY ANSWER TO F
Japan and the United States are major trading partners and the exchange rate between the Japanese yen and the United States dollar is determined in a flexible foreign exchange market.
(c) Assume instead household savings increased in the United States. Draw a correctly labeled graph of the loanable funds market in the United States, and show the effect of the increase in household savings on the equilibrium real interest rate.
(d) Based on the change in the equilibrium real interest rate identified in part (c), what will happen to financial capital flows to the United States?
(e) Based on your answer to part (d), what will happen to the international value of the dollar in the foreign exchange market? Explain.
(f) Based on your answer to part (e), will the Federal Reserve buy or sell yen in the foreign exchange market to stabilize the dollar/yen exchange rate? Explain.
ONLY ANSWER TO F
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