For the following question, use the simple monetary model (where L is constant). You will find it easier to treat Korea as the home country and Japan as the foreign country.
In 2016, Japan experienced relatively slow output growth (0.5%), whereas Korea had relatively robust output growth (7%). 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 10% per year.
a. What is the inflation rate in Korea? In Japan?
b. What is the expected rate of depreciation in the Korean won relative to the ?Japanese yen?
c. Suppose the Bank of Korea increases the money growth rate from 10% to 15%. If nothing in Japan changes, what is the new inflation rate in Korea? ?
d. Using time series diagrams, illustrate how this increase in the money growth rate affects the money supply, MK; Price level, PK; real money supply; and Ewon/¥ over time. (Plot each variable on the vertical axis and time on the horizontal axis.)