1. Q1
1.1 The Yen /$ exchange rate amounts to 80 Yen /$. Assume that moneysupply in Japan increases from 20% to 40% of its GDP.As a result, the interestrate in Japan has reduced from 1% to 0.5 %. Express the new level of exchangerate after the monetary expansion in terms of its expected rate. We assume thatthe US interest rate remains constant as 2.5%.

1.2 Assuming that there will be no change inthe US inflation and interest rate, what would be the inflation rate and thedegree of appreciation or depreciation of exchange rate in the long run?

1.3 What would be the value of exchange ratein the short run following such a monetary expansion? We assume thatagents are rational and have perfect foresight for the future.

1.4 What do you observe comparing the spotrate and its long run expected value? Discuss. (2 points)

2. Q2
2.1 Take one good or service sold in Japanand anywhere in the world (ex. i-pad, T-shirt, tuition fee in the universityetc.). Assuming that there holds the low of one price, compute the impliedexchange rate between yen and the currency of your choice.

2.2 Comparing that rate with the actualrate, what do you observe? Discuss the result.