(this is the scenario from question #4 )
Consider the same scenario as in Question 4; the initial money growth rates and real growth are the same. Now, however, use the general monetary model, in which L is no longer assumed constant and money demand is inversely related to the nominal interest rate to answer the following questions. Assume in addition that the nominal interest rate in Japan is i* = .03. a. What is the interest rate in Korea? b. Show that the real interest rate in Korea is equal to the real interest rate in Japan. c. Suppose the Bank of Korea again increases the money growth rate from 7 = .12 to n = .15. If the nominal interest rate in Japan remains unchanged, what happens to the nominal interest rate in Korea? d. Draw a series of time-series graphs depicting how the increase in the Korean money growth rate would affect (1) the Korean nominal interest rate i, (2) the Korean price level P, (3) the Korean real demand for money L(i)Y, and (4) the exchange rate E (won per yen). 4. A Numerical example of the Basic Model II (This adapted from Question # 7 in Chapter 3 of the text.) Consider two countries, Japan and Korea. Suppose that Korea is the "home" economy and Japan is the foreign economy. The Korean money growth rate is u .12, while that of Japan is n = .02; the Korean real growth rate g = .06 and the Japanese real growth rate is g* .01. For the following questions, use the basic monetary model (where the L's are constant). Treat Korea as the home country and Japan as the foreign country, so the exchange rate E is measured in won per yen. Consider the same scenario as in Question 4; the initial money growth rates and real growth are the same. Now, however, use the general monetary model, in which L is no longer assumed constant and money demand is inversely related to the nominal interest rate to answer the following questions. Assume in addition that the nominal interest rate in Japan is i* = .03. a. What is the interest rate in Korea? b. Show that the real interest rate in Korea is equal to the real interest rate in Japan. c. Suppose the Bank of Korea again increases the money growth rate from 7 = .12 to n = .15. If the nominal interest rate in Japan remains unchanged, what happens to the nominal interest rate in Korea? d. Draw a series of time-series graphs depicting how the increase in the Korean money growth rate would affect (1) the Korean nominal interest rate i, (2) the Korean price level P, (3) the Korean real demand for money L(i)Y, and (4) the exchange rate E (won per yen). 4. A Numerical example of the Basic Model II (This adapted from Question # 7 in Chapter 3 of the text.) Consider two countries, Japan and Korea. Suppose that Korea is the "home" economy and Japan is the foreign economy. The Korean money growth rate is u .12, while that of Japan is n = .02; the Korean real growth rate g = .06 and the Japanese real growth rate is g* .01. For the following questions, use the basic monetary model (where the L's are constant). Treat Korea as the home country and Japan as the foreign country, so the exchange rate E is measured in won per yen
