3. Recently Bank of Japan decided to further reduce interest rate in Japan and Fed of the U.S. decided to start to raise interest rate.

  1. According to asset approach to exchange rate determination, all else equal, if the equilibrium were to restore in financial markets, how will the value of U.S. currency change?
  2. Show the graph when increase in US interest rate and reduction of Japanese interest rate on the FX market. Draw the money market graph in the US and Japan and show what changes in nominal money supply could have led to interest rates rising in the US and falling in Japan.
  3. If the changes in nominal money supply you identified above were permanent, show the short- run impact on the US money market and FX market.
  4. And how does the the spot exchange rate, expected exchange rate, U.S. price level and Japan price level change in the long run?