1. Other things equal, how would you expect the following shifts to affect a currency's real exchange rate against foreign currencies?

a.The overall level of spending doesn't change, but domestic residents decide to spend

more of their income on nontraded products and less on tradable.

b.Foreign residents shift their demand away from their own goods and toward the

domestic country's exports.

2. Consider the change in the real exchange rate (q) from each of the events in question 1 above.How does the change in q impact the nominal exchange rate (using the extended monetary approach that includes the real exchange rate)?

3. Use the general monetary model and allow money demand to depend on the nominal interest rate.Assume that bank deposits in Japan pay 3% interest (i=3%)

a.Compute the interest rate paid on Korean deposits.

b.Show that the real interest rate in Korea is the same as in Japan.

c.Suppose the Bank of Korea increases the money growth rate from 12% to 15% 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?

d.What happens to the exchange rate?

e.Illustrate using time series diagrams how the 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.