Initially, the real interest rates in the United States and Japan are equal to 7 percent. The real interest rate in the United States decrease to 5 percent while the real interest rate in Japan increases to 8 percent.
How and why will capital flows be affected by this change in real interest rates? Draw the change in capital flow on the Loanable funds market of the US.
Using a correctly labeled graph for the yen market, show and explain how the value of the yen will change relative to the value of the dollar.
Explain how the value of the yen will affect each of the following in the United States:
Imports from Japan
Exports to Japan
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