Q. This question uses the general monetary model, where L is no longer assumed constant, and money demand is inversely related to the nominal rate of interest. Consider the same scenario described at the beginning of the previous question. (Consider two countries: Japan and Korea. In 1996 it experienced comparatively slow output growth (1%), while Korea had relatively robust output growth (6%). Suppose the Bank of Japan allowed the money supply to grow by 2% each year, while the Bank of Korea chose to maintain relatively high money growth of 12% per year). In addition, the bank deposits in Japan pay a 3% interest rate, i¥ = 3%.
Compute the interest rate paid on Korean deposits.