Consider two countries, Japan and Korea. In 1996, Japan experienced relatively slow output growth (1%), whereas Korea had relatively robust output growth (6%). Suppose the Bank of Japan allowed the money supply to grow by 2% each year, whereas the Bank of Korea chose to maintain relatively high money growth of 12% per year. For the following questions, use the simple monetary model (where L is constant). You will find it easiest to treat Korea as the home country and Japan as the foreign country.
This question uses the general monetary model, in which L is no longer assumed constant and money demand is inversely related to the nominal interest rate. Consider the same scenario described in the beginning of the previous question. In addition, the bank deposits in Japan pay 3% interest; i¥ = 3%.
a.) Calculate the interest rate paid on Korean deposits.