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Explain briefly the short-run effects of the following policies in the following policies in the FX...

Explain briefly the short-run effects of the following policies in the following policies in the FX and money market, using the relevant economic equilibrium conditions in your explanation.

Suppose the Bank of Korea (south Korea's central bank) announces and implements a permanent decrease of its money supply.

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Answer #1

With bank of Korea decreasing its money supply, there will be a shortage of the Korean currency in the foreign exchange market. So this will cause the curreny to appreciate. The result of this would be increase in the imports of Korea and decrease in its exports.

The decrease in the money supply by bank of Korea will decrease the availability of money in the economy. This will rise the level of interest rate and will discourage people to borrow money for investment purposes. Also decrease in money supply will lead to decrease in the consumption expenditure and subsequently fall in the GDP level.

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