Question

1. Monetary Approach to Exchange Rates Suppose you learn that the current exchange rate for the Japanese Yen is $1 = 120 yen. a. If you expect Japanese monetary growth to be a total of 25% larger over the next ten years than US monetary growth, what is your best guess as to the exchange rate ten years from now? What theory underlies your prediction? Explain why we apply this theory here over a long run period, like 10 years, rather than over a short period, say less than a year? b. If you expect that in addition to the higher money growth rate in Japan above, you also expect the output growth rate to be higher in Japan by 30%. Would you predict that the value of the Japanese yen will appreciate or depreciate relative the dollar (more or fewer dollars per yen).

please explain part A and Part B separately.

Answer 1

Solution:

Japanese exchange rate for Yen is $1=120 Yen

My closest speculation would be , the currency acknowledges to 114 yen;

count is = (120-[120*(1-0.25)^10)

=(120-[120*(0.75)^10)

= 113.24 yen

a)

Cash supply in any economy ought to be in confirm with the interest for cash by the individuals. The Amount Hypothesis of Cash tells that if there is no adjustment in level of creation and the economy is steady, with the ascent in supply of cash will raise the value level of products and enterprises. Unexpectedly, if the inventory of cash is diminished, it will have negative effect on general value level.

In the inquiry, Japanese economy has been referred to where it is accepted that the cash supply in Japan builds 25 percent over the stockpile of cash in the US. On the off chance that the Japanese can raise the profitability with their ascent in cash supply, there will be no effect on terms of exchange. The Terms of exchanges is characterized as the proportion of Fare Costs to that of Import costs. Here, Fisher's condition of exchange request by cash supply.

In this manner, as talked about over, 25 percent rise cash supply in Japan would put the inside costs rise. Normally there will be aggregate 20% ascent in sends out by the US. The Value Record is determined regarding some base, and ideally over a time of 10 years.

b. In the event that Gross domestic product development rates are likewise higher in Japan alongside the expanding cash supply then The ascent in local Gross domestic product will in general increment the interest for imports. The expansion in imports will make the present record decay. The expansion in imports bought will build the need to change over residential to remote cash. Thus, the conversion scale of the household money will diminish.