For the following question, use the simple monetary model (where L is constant). You will find it easier to treat Korea as the home country and Japan as the foreign country.

In 2016, Japan experienced relatively slow output growth (0.5%), whereas Korea had relatively robust output growth (7%). Suppose the Bank of Japan allowed the money supply to grow by 2% each year, whereas the Bank of Korea chose to maintain relatively high money growth of 10% per year.

a. What is the inflation rate in Korea? In Japan?

b. What is the expected rate of depreciation in the Korean won relative to the ?Japanese yen? ?

c. Suppose the Bank of Korea increases the money growth rate from 10% to 15%. If nothing in Japan changes, what is the new inflation rate in Korea? ?

d. Using time series diagrams, illustrate how this increase in the money growth rate affects the money supply, MK; Price level, PK; real money supply; and Ewon/¥ over time. (Plot each variable on the vertical axis and time on the horizontal axis.)