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[Please note that you need to complete drawing the Exchange Rate diagram on your own piece of paper as you explain your answers for part

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[Please note that you need to complete drawing the Exchange Rate diagram on your own piece of paper as you explain your answers for part (a) of this question. Take a photo-shot (or screen short) of the completed diagram ONLY and upload it in the uploading section below Bip following this question. However, all your explanations MUST be written in the space provided below following the question] Many countries, including the United States and Australia, are currently experiencing high inflation rates. The 2022 inflation rate in the United States have recorded more than 8 per cent, the highest rates since 1982, and Australia is also experiencing the inflation rates above the RBA's target inflation rates. As a result, the US Federal Reserve has taken a 'Big-step' to raise the interest rate by 50 basis points in May 2022 to lower the inflation rates. Australia too has raised its interest rate by 25 basis points in May 2022, the first time in more than 15 years. Unlike the US and Australia, however, Japanese government keeps its low interest rate and has shown no signs of raising its interest rate yet. This indicates that the interest rate differential between the United States and Japan is widening, as well as the rate differential between Australia and Japan. Given this monetary policy reaction in the United States, answer the following questions. For simplification of the analysis, assume that the US government keeps its fiscal policy and everything else unchanged. a) Discuss how you would expect an increase in interest rate in the United States to affect the US asset and financial markets. Analise and discuss what would happen to demand for and supply of US dollar, the value of US dollar, the exchange rate (depreciation or appreciation) against Japanese Yen (currency). In your discussion, use the exchange rate diagram below as a starting point to explain your analysis and show the movement of the US exchange rate against Japanese Yen, Yen/USS. (hint: use demand for and supply of US dollar). (15 marks) Exchange rates (Yen/US$) 31(15 marks) Exchange rates (Yen/US$) Do Quantity of US$ traded (b ) Discuss how the change in US exchange rate against Japanese Yen is expected influence exports, imports, the current account balance (improve or worsen) and international competitiveness of the United States and Japan. (10 marks) A B Go U S X2 x2 31

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