Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. If the question prompts you to “Calculate,” you must show how you arrived at your final answer.
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.
(a) Assume real income increased in the United States. Draw a correctly labeled graph of the foreign exchange market for the yen, and show the effect of the increased real income in the United States on the equilibrium exchange rate for the yen.
(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) Unemployment in Japan. Explain.
(iii) Japan’s long-run aggregate supply
(c) Assume instead household savings increased in the United States. Draw a correctly labeled graph of the loanable funds market in the United States, 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) Based on your answer to part (e), will the Federal Reserve buy or sell yen in the foreign exchange market to stabilize the dollar/yen exchange rate? Explain.
Answers
Answer:
Not sure but this is how the mister solved it with us. If u see any wrong answers please help by correcting it.
A) a correctly labeled graph is attached
B)
( i ) increase, because the demand of Japanese good will increase, which will increase the net exports.
( ii ) decrease, because the demand for labor will go up (increase), leading to a decrease in the unemployment.
( ii ) stay the same, because the long-run aggregate supply will not be affected by the increase in income.
C) the graph is attached
D) There will be financial capital outflows
Explanation:
There will be a decrease In the interest rate, as well as an increase in the supply of loanable funds, which has changed the equilibrium rate, by that the financial capital flow will be decreasing ( outflow )
E) that the dollar will depreciate the financial capital will flow out of the United
States seeking higher returns on financial investments in foreign countries, which will result in a decrease in the
demand for the dollar or an increase in the supply of the dollar.
Explanation:
It will depreciate, because initially when the dollar was worth a lot of money, people will buy more yen, if that keeps going on the yen will become stronger, because its demand will increase, but the dollar will decrease in value. ( depreciate)
- increase the supply of the dollar
- decrease the demand of the dollar
F) it will sell the yen in the foreign exchange market, by that the supply of the yen will increase and the demand of the dollar will increase, which will cause an appreciation to the dollar to yen.
The correct answers are given as follows:
B) ( i ) increase, because the demand for Japanese goods will increase, which will increase the net exports.( ii ) decrease, because the demand for labor will go up (increase), leading to a decrease in unemployment.( ii ) stay the same, because the long-run aggregate supply will not be affected by the increase in income.D) There will be financial capital outflowsWhat are Trade Partners?This refers to a group of people, usually a country ir company that engages in business deals together.
Hence, we can note that Japanse net exports would increase because there would be a rise in demand, there would be a decrease in unemployment in Japan as a result of demand for labor and Japan’s long-run aggregate supply would remain the same.
Furthermore, with a change in the equilibrium real interest rate, there would be financial capital flows to the United States.
Read more about trade partners here:
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