Question

45. The US considers Japan an important trade partner with a lot of trade between the two countries beginning with agricultural produce to capital goods and machineries. The following questions deal with the foreign exchange market between the two countries. Assuming that both countries have relatively flexible exchange rate policies find the new equilibrium.

a. A recession hits the US only. Draw the diagram from the perspective of a US citizen looking to buy Japanese Yen, and also of a Japanese tourist buying US Dollars before he vacations in Disneyland, CA.

b. In the market for dollar, if the Federal Reserve reacts to possible inflationary pressure by increasing interest rates. (from the perspective of a US citizen looking to buy Yen)

c. In the market for Yen when an increased popularity of poke bars and sushi lead to a surge in demand for Japanese tuna. (Choose either perspectives)

d. What happens when the Japanese government chooses an expansionary fiscal policy by increasing government spending by issuing new public debt, leading to a crowding out effect. (Show the relevant money market, AD-AS and foreign exchange rate market graphs)

Answer 1

Answer :-

A):-

Recession makes defaltionary gap as appeared in the graph an underneath. Aggregate demand moves left and price levels in USA will go down from p1 to p2.

Real GDP is likewise low from potential Y1 to Y2. This will urge USA fares to increment. USA dollar will acknowledge as demand for dollars move directly as appeared in figure b below.

B):- As loan fees go uo in USA there will be more inflow of investments in USA from Japan and USA dollar will futher acknowledge as appeared in figure c below.

C):- Yen will acknowledge as there is more demand for Tuna and demand for Yen moves right.

D):- As japanese government places more cash in the business sectors, aggregate demand in Japan moves right and henceforth imports will likewise go up and consequently as dollars are demanded more to pay merchandise from USA , dollar increases in value.

Allude figure d and c. Swarming out is when greater government speculation raises loan costs and drives private venture out.

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