# If the nominal interest rate in japan remains

• Notes
• 13
• 97% (31) 30 out of 31 people found this document helpful

This preview shows pages 12–13. Sign up to view the full content.

and the inflation rate rises proportionately (one for one) with this increase. If the nominal interest rate in Japan remains unchanged, what happens to the interest rate paid on Korean deposits? Answer: We know that the inflation rate in Korea will increase to 9%. We also know that the real interest rate will remain unchanged. Therefore: i won r won K 1% 9% 10%. S-18 Solutions Chapter 3 Exchange Rates I: The Monetary Approach in the Long Run

This preview has intentionally blurred sections. Sign up to view the full version.

Solutions Chapter 3 Exchange Rates I: The Monetary Approach in the Long Run S-19 d. Using time series diagrams, illustrate how this increase in the money growth rate affects the money supply, M K ; Korea’s interest rate; prices, P K ; real money supply; and E won over time. (Plot each variable on the vertical axis and time on the hor- izontal axis.) Answer: See the following diagrams. M K 1 2 P K T Time Time M K / P K Time i won T Time E won/Y Time Bank of Korea increases money growth rate 9. Both advanced economies and developing countries have experienced a decrease in inflation since the 1980s (see Table 3-2 in the text). This question considers how the choice of policy regime has influenced this global disinflation. Use the monetary model to answer this question. a. The Swiss Central Bank currently targets its money growth rate to achieve pol- icy objectives. Suppose Switzerland has output growth of 3% and money growth of 8% each year. What is Switzerland’s inflation rate in this case? Describe how the Swiss Central Bank could achieve an inflation rate of 2% in the long run through the use of a nominal anchor. Answer: From the monetary approach: S S g S 8% 3% 5%. If the Swiss Central Bank wants to achieve an inflation target of 2%, it would need to re- duce its money growth rate to 5%: * S S g S 2% 3% 5%.
This is the end of the preview. Sign up to access the rest of the document.
• Winter '13
• TOMBE
• Exchange Rate, japan, Foreign exchange market, United States dollar

{[ snackBarMessage ]}

### What students are saying

• As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

Kiran Temple University Fox School of Business ‘17, Course Hero Intern

• I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

Dana University of Pennsylvania ‘17, Course Hero Intern

• The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

Jill Tulane University ‘16, Course Hero Intern