Japan is the country of Macroville’s largest trading partner. Macroville’s currency is the dollar. Japan uses the Yen currency. Recently, the Japanese central bank raised interest rates.
a) Using a correctly labeled graph of the foreign exchange market for Macroville, show the impact of the Japanese central bank decision.
b) Given your answer in part (a), what will happen to Marcoville’s exports and imports to and from Japan? Explain.
c) Identify what will happen to the Macroville dollar, as a result of the Japanese central banking decision.
d) Given your answer in part (c), draw a correctly labeled graph of aggregate demand and aggregate supply, showing what will happen to Macroville’s real output and price level.
e) As a result of your graph in part (d), identify an appropriate response for the Macroville central bank to take.
f) Draw a correctly labeled graph of the money market and show how your answer to part (e) would affect nominal interest rates in Macroville.