Consider two countries: Japan and South Korea. In 1996 Japan experienced relatively slow output growth (1%), while South Korea had relatively robust output growth (5%). Suppose the Bank of Japan allowed the money supply to grow by 1% each year, while the Bank of Korea chose to maintain relatively high money growth of 15% per year. Treat South Korea as the home country and Japan as the foreign country, and use the simple monetary model (with constant L) to answer the following questions:   a. What is the inflation rate in South Korea ()? How about Japan ()?                   b. What is the expected rate of depreciation in the Korean won relative to the Japanese yen?       c. Suppose the Bank of Korea decreases the money growth rate from 15% to 10%. What is the new inflation rate in South Korea?                       d. Using time series diagrams (impulse graphs), illustrate how this decrease in the money growth rate affects South Korea’s nominal money supply MK; prices PK, real money supply, and Ewon/yen over time.

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
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Chapter1: Making Economics Decisions
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  1. Consider two countries: Japan and South Korea. In 1996 Japan experienced relatively slow output growth (1%), while South Korea had relatively robust output growth (5%). Suppose the Bank of Japan allowed the money supply to grow by 1% each year, while the Bank of Korea chose to maintain relatively high money growth of 15% per year. Treat South Korea as the home country and Japan as the foreign country, and use the simple monetary model (with constant L) to answer the following questions:

 

a. What is the inflation rate in South Korea ()? How about Japan ()?

 

           

 

 

b. What is the expected rate of depreciation in the Korean won relative to the Japanese yen?

 

 

 

c. Suppose the Bank of Korea decreases the money growth rate from 15% to 10%. What is the new inflation rate in South Korea?

 

           

 

 

 

 

d. Using time series diagrams (impulse graphs), illustrate how this decrease in the money growth rate affects South Korea’s nominal money supply MK; prices PK, real money supply, and Ewon/yen over time.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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