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Consider the relationship between the Japanese yen () and U.S. dollar ($). Let the exchange rate be defined as $ per , E$/. Apply the
Consider the relationship between the Japanese yen () and U.S. dollar ($). Let the exchange rate be defined as $ per , E$/. Apply the money market-foreign exchange market diagrams to answer the following questions. On all graphs, label the initial equilibrium point A.
- Suppose the decrease in Japan's money supply isconsidered as permanent and monetary policy is credible. Would the exchange rate overshoot in the short run? Apply the money market-foreign exchange market diagram to analyzing the short-run exchange rate equilibrium and long-run adjustments of Japanese price level and exchange rate.
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