This question considers how the FX market will respond to changes in monetary policy in South Korea. For these questions, define the exchange rate as South Korean won per Japanese yen, Ewon/¥. Use the FX and money market diagrams to answer the following questions. On all graphs, label the initial equilibrium point A. a. Suppose the Bank of Korea permanently decreases its money supply. Illustrate the short-run (label equilibrium point B) and long-run effects (label equilibrium point C) of this policy. b. Now, suppose the Bank of Korea announces it plans to permanently decrease its money supply but doesn’t actually implement this policy. How will this affect the FX market in the short run if investors believe the Bank of Korea’s announcement? Please illustrate your answer graphically as well labeling the short run equilibrium B. c. Finally, suppose the Bank of Korea permanently decreases its money supply, but this change is not anticipated. When the Bank of Korea implements this policy, how will this affect the FX market in the short run? Please illustrate your answer graphically as well labeling the short run equilibrium B.
This question considers how the FX market will respond to changes in monetary policy in South Korea. For these questions, define the exchange rate as South Korean won per Japanese yen, Ewon/¥. Use the FX and money market diagrams to answer the following questions. On all graphs, label the initial equilibrium point A. a. Suppose the Bank of Korea permanently decreases its money supply. Illustrate the short-run (label equilibrium point B) and long-run effects (label equilibrium point C) of this policy. b. Now, suppose the Bank of Korea announces it plans to permanently decrease its money supply but doesn’t actually implement this policy. How will this affect the FX market in the short run if investors believe the Bank of Korea’s announcement? Please illustrate your answer graphically as well labeling the short run equilibrium B. c. Finally, suppose the Bank of Korea permanently decreases its money supply, but this change is not anticipated. When the Bank of Korea implements this policy, how will this affect the FX market in the short run? Please illustrate your answer graphically as well labeling the short run equilibrium B.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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- This question considers how the FX market will respond to changes in
monetary policy in South Korea. For these questions, define the exchange rate as South Korean won per Japanese yen, Ewon/¥. Use the FX andmoney market diagrams to answer the following questions. On all graphs, label the initial equilibrium point A.
a. Suppose the Bank of Korea permanently decreases its money supply. Illustrate the short-run (label equilibrium point B) and long-run effects (label equilibrium point C) of this policy.
b. Now, suppose the Bank of Korea announces it plans to permanently decrease its money supply but doesn’t actually implement this policy. How will this affect the FX market in the short run if investors believe the Bank of Korea’s announcement? Please illustrate your answer graphically as well labeling the short run equilibrium B.
c. Finally, suppose the Bank of Korea permanently decreases its money supply, but this change is not anticipated. When the Bank of Korea implements this policy, how will this affect the FX market in the short run? Please illustrate your answer graphically as well labeling the short run equilibrium B.
d. Using your previous answers, evaluate the following statements by stating if it is true or false, and then explain.
- If a country wants to increase the value of its currency, it can do so (temporarily) without raising domestic interest rates.
- The central bank can decrease both the domestic price level and value of its currency in the long run.
- The most effective way to increase the value of a currency is through surprising investors.
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