Question

pls answer part "d" specifically. Thanks!

Q2. This question uses the general monetary model, where L is no longer assumed constant, and money demand is inversely related to the nominal interest rate. Consider two countries: Japan and South Korea. In 1996 Japan experienced relatively 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 15% per year. In addition, the bank deposits in Japan pay a 3% interest rate, i¥ = 3%.

a. Compute the interest rate paid on South Korean deposits. (1 mark)
b. Using the definition of the real interest rate (nominal interest rate adjusted for inflation), show that the real interest rate in South Korea is equal to the real interest rate in Japan. (Note that the inflation rates you computed in the previous question will be the same in this question.) (1 mark)
c. Suppose the Bank of Korea decreases the money growth rate from 15% to 12% and the inflation rate falls proportionately (one for one) with this decrease. If the nominal interest rate in Japan remains unchanged, what happens to the interest rate paid on South Korean deposits? (1 mark)
d. Using time series diagrams, illustrate how this decrease in the money growth rate affects the money supply MK; South Korea’s interest rate; prices PK; real money supply; and Ewon/¥ over time. (Plot each variable on the vertical axis and time on the horizontal axis.) (1 mark)

Answer 1

Answer :-

2.(d) :- As per simple monetary model, inflation rate is equivalent to money supply growth short the real output growth rate. On the off chance that money growth rate decreases, at that point inflation rate falls (given that real output Growth stays same).

In this way, money supply falls. alongside that, inflation rate falls. Leave T alone the timeframe when the money supply is decreased.

Money supply is indicated by and inflation rate is indicated by . Addendum 1 means the timespan before the money supply growth fall and 2 shows the timeframe when money growth rate is diminished.

Since both and falls, the distinction between them continues as before. Henceforth the growth of real money supply continues as before as it was previously.

All the factors are plotted in figure 1.