Suppose the Financial Times reported that Japan intended to promote inflows of foreign direct investments by reducing or eliminating bureaucratic restrictions that discouraged foreign investors (specifically, foreign companies) from entering Japan. Assume the Japanese yen was fixed relative to the U.S. dollar, the current exchange rate was ¥100/$, and foreign investors borrowed outside Japan and converted their funds to yen. Assume further that international capital markets between the United States and Japan were highly mobile. Explain the effect (if any) these inflows should have on Japan's real exchange rate, monetary base, M2 money multiplier, real risk-free interest rate, and reserve assets in the balance of payments.
a. Would these international capital flows be more or less stimulatory/contractionary if Japan's consumption (C) and gross private domestic investment (I) had very low interest-rate elasticities? Explain.