5. Assume that Japan and the US are trading partners. a. Draw a model showing the foreign exchange for the U.S. dollar (compared with the yen) (__ /2). b. Draw another model showing the foreign exchange rate for the yen (compared to the U.S. dollar). /2) c. Now assume that the US Federal Reserve institutes a policy that raises interest rates in the United States relative to interest rates in Japan. Is this a fiscal or monetary policy? ( __/1) d. Show what happens - on both models - based on this new Federal Reserve policy. ( /3) e. Has the dollar appreciated or depreciated? (__ f. Has the yen appreciated or depreciated? /1) g. As a result of the changing value of the U.S. dollar: i. ii. iii. Will US exports increase or decrease? Why? ( Will US imports increase or decrease? Why? Will US aggregate demand shift left or right? (
Japan and the United States are major trading partners and the exchange rate between the Japanese yen and the United States dollar is determined in a flexible foreign exchange market.
b) Will each of the following increase, decrease, or stay the same as a result of the increase in the United States real income? (i) Japan’s net exports. Explain. (ii)
(c) Assume instead household savings increased in the United States. What would happen on loanable funds market in the United States with the supply of loanable funds, and show the effect of the increase in household savings on the equilibrium real interest rate.
(d) Based on the change in the equilibrium real interest rate identified in part (c), what will happen to financial capital flows to the United States?
e) Based on your answer to part (d), what will happen to the international value of the dollar in the foreign exchange market? Explain. (f) What will happen to net exports in USA? Explain.
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