Suppose there are two countries, the US and Japan operating under a flexible exchange rate regime. Japan
Question:
Suppose there are two countries, the US and Japan operating under a flexible exchange rate regime. Japan elects a new prime minister who convinces the Bank of Japan (BOJ) to pursue an expansionary monetary policy. Assuming the standard Keynesian assumptions show what happens to interest rates, output and the exchange rate in the US. To do so, use the following diagrams all pertaining to the US: Keynesian cross on the top left, the IS - LM diagram on the bottom left and the FX market on the bottom right. Label the initial point as point A and point B as the new equilibrium after the monetary expansion in Japan. As is customary, label the initial output (Y), interest rate (i), and nominal exchange rate (E) with a subscript 1, and the corresponding values after the monetary expansion in Japan with a subscript 2. Note again that we are modeling US economic variables, not those for Japan
Discuss the factors influencing the trade balance for the US. There are three to discuss (ignore any J curve effects).
Expert Answer:
Under the given scenario of an expansionary monetary policy in Japan several factors can influence the trade balance for the US Lets discuss three of ... View the full answer
