Question
Draw a figure which combines the foreign exchange market (in which yen and US dollars are in transaction) diagram and the Japanese money market diagram
Draw a figure which combines the foreign exchange market (in which yen and US dollars are in transaction) diagram and the Japanese money market diagram to explain the short-run effects of the following two events (which are happening simultaneously):
- A decrease of the Japanese real output (Y), and
- A temporary increase of the Japanese money supply.
On the vertical axis of your foreign exchange market diagram, please take Eyen/$ (yen-per-US dollar exchange rate). Take "real money holdings" on the vertical axis of the Japanese money market diagram. The horizontal axis of your "combined" diagram has to be the "rates of return (in yen)". Explain your answer fully both in your diagram and full sentences. Label all of the curves/lines as well as axes and clearly show the directions of the shifts of any curve/line. In your answer, please clarify whether the Japanese yen appreciates or depreciates against the US dollar.
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