Question
For each prompt below, carefully and thoroughly follow the directions. For the graphs, be certain to accurately label all axes, curves, and points as appropriate.
For each prompt below, carefully and thoroughly follow the directions. For the graphs, be certain to accurately label all axes, curves, and points as appropriate. Use arrows to indicate the direction of any shifts. Show your work for any calculations.
Part 1: The United States and Canada are trade partners. Each country has a zero current account balance and is operating in long-run equilibrium. Assume that inflationary pressure causes the price level in the United States to rise relative to Canada.
(b) Illustrate the impact of the change you identified in part (a) on a fully labeled AD-AS model for the U.S. economy. Use arrows to indicate any changes in AD, real GDP, and price level.
(d) On side-by-side and fully labeled foreign exchange market graphs, illustrate the impact of the change in relative inflation on supply of the U.S. dollar (USD) and on demand for the Canadian dollar (CAD). Use arrows to indicate the change in the equilibrium exchange rate for each currency.
Part 2: Japan and China are trade partners, each with a current account balance of zero. The government of Japan increases taxes for all businesses in Japan. As a result, Japan's real income falls.
(e) On a fully labeled foreign exchange market graph, illustrate the impact of Japan's decrease in real income on the Japanese yen (JPY) with the price in terms of the Chinese renminbi (RMB).
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