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3. Exchange rates and interest rates are important for macroeconomic decision making (a) How does an increase in Japans government budget deficit affect each of the following? (i) The real interest rate in the short run in Japan. Explain (ii) Private domestic investment in plant and equipment in Japan (b) Draw a correctly labeled graph of the foreign exchange market for the euro, and show the effect of the change in the real interest rate in Japan from part (a)(i) on each of the following. (i) Supply of euros. Explain. (ii) Yen price of the euro (c) To reverse the change in the yen price of the euro identified in part (b)(ii), should the European Central Bank buy or sell euros in the foreign exchange market?
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The real interest rate increases because demand for loanable funds increase and people become skeptic about lending to govt.

B private domestic investment will fall due to crowding out

2 see image

3 It should buy to decrease supply and thus restrict depreciation of euro

yen ajam ten-pie-rfal ftom to 1-ag-apply increases (b 2

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