If the nominal interest rate in japan remains

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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
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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%.
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