We make use of the general monetary model here, where L is no longer assumed constant, and money demand is inversely related to the nominal interest rate. Recall from that earlier question inflation rate in Korea is = 10% and inflation rate in Japan is = 0%. In addition, assume that the bank deposits in Japan pay 2% interest rate (i¥ = 2%). a. Compute the interest rate paid on South Korean won deposits (iwon). b. Using the definition of the real interest rate, show that the real interest rate in South Korea (rwon) is equal to the real interest rate in Japan (r¥) c. Suppose the Bank of Korea decreases the money growth rate from 15% to 10% and the inflation rate falls proportionately (one for one) with this decrease. If the nominal interest rate in Japan remains unchanged, what happens to the interest rate paid on Korean won deposits? d. Using time series diagrams (impulse graphs), illustrate how this decrease in the money growth rate affects South Korea’s nominal money supply MK; nominal interest rate iwon; price level PK; real money supply, and Ewon/yen over time.
Monetary Policy and Equation of Exchange
The monetary policy has been defined as the policy that is used by the Federal Reserve (the central bank of the US) or the central bank (the central bank of India is RBI) along with the use of the supply of money to accomplish certain macroeconomic policies. Monetary policy is a supply-side macroeconomic policy that supervises the growth rate and money supply in the economy.
Monetary Economics
As from the name, it is very evident that monetary economics deals with the monetary theory of economics. Therefore, we can say that monetary economics, is that part of economics that provides us with the idea or notion of analyzing money as a holding with its function, which acts as the medium of exchange, the store of value through which the buying and selling are done and also the unit of account. It also helps in formulating the framework of the monetary policy of a bank in an economy which ultimately results in the welfare of the people residing in that particular economy. The monetary policy of an economy also helps to analyze and evaluate the financial health of it.
- We make use of the general monetary model here, where L is no longer assumed constant, and money demand is inversely related to the nominal interest rate. Recall from that earlier question inflation rate in Korea is = 10% and inflation rate in Japan is = 0%. In addition, assume that the bank deposits in Japan pay 2% interest rate (i¥ = 2%).
a. Compute the interest rate paid on South Korean won deposits (iwon).
b. Using the definition of the real interest rate, show that the real interest rate in South Korea (rwon) is equal to the real interest rate in Japan (r¥)
c. Suppose the Bank of Korea decreases the money growth rate from 15% to 10% and the inflation rate falls proportionately (one for one) with this decrease. If the nominal interest rate in Japan remains unchanged, what happens to the interest rate paid on Korean won deposits?
d. Using time series diagrams (impulse graphs), illustrate how this decrease in the money growth rate affects South Korea’s nominal money supply MK; nominal interest rate iwon;
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