Suppose that Japan (country ) and China (country b) do not have foreign currency controls in effect.

Question:

Suppose that Japan (country α) and China (country b) do not have foreign currency controls in effect. The total demand for money is always 2,000 goods in Japan and 1,000 goods in China. The fiat money supplies are 100 yen in Japan and 300 yuan in China.
a. Find the value of each country’s money if the exchange rate e_t(as defined in the text) is 3. Do the same if e_t= 1.Is one exchange rate likelier than the other? Explain.
b. Suppose the exchange rate is 3 and China triples its fiat money stock, whereas Japan prints no new money. How many goods will China gain in seigniorage? What fraction of this seigniorage comes from Japanese citizens?

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...

Fantastic news! We've Found the answer you've been seeking!