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Use the FX and money market diagrams to answer the following questions. This question considers the...

Use the FX and money market diagrams to answer the following questions. This question considers the relationship between the Japanese yen (¥) and U. S. dollar ($). Let the exchange rate be defined as $ per ¥, E$/¥. On all graphs, label the initial equilibrium point A. U.S. is the home country.

    1. Illustrate how a temporary decrease in Japan’s money supply affects the money and FX markets in the short run. Be sure to label the axes, the initial equilibrium and the final equilibrium.
    1. Using your diagram from (a), state how each of the following variables changes in theshort run(increase/decrease/no change): U. S. interest rate, Japanese interest rate, E$/¥, Ee$/¥, Japan price level and U. S. price level.

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