Question

1. Suppose the bank of Japan decreases the Japanese money supply temporarily.
Using the asset approach, with sticky prices in the short run, what will happen to the value of the yen relative to the dollar (dollars per yen) in the short run?
Explain and graph.
2. Suppose the Fed decreases the money supply permanently.
What happens to the value of the dollar relative to the euro in the short run and in the long run?
Describe the path of the exchange rate over time.
Explain and graph.
3. The central bank of the Czech Republic has fixed the value of the Koruna to the euro.
Facing a declining inflation rate, the European central bank has decided to increase the Eurozone money supply.
What impact will this have on the exchange rate of the Koruna.
Explain.
What must the Czech central bank do to maintain the value of the Koruna?
Explain and Graph.
4. What is the current account?
What does a current account deficit tell us in terms of national income, national expenditures, national saving and investment?
What is the financial account?
What does a financial account surplus tell us?
How are the two accounts related?

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