Question 1. In the May 1 issue of the Financial Times an article discusses how the Bank of Japan is having troubles reaching a desired 2% inflation rate. The Bank now believes an expansionary monetary policy will be needed well into 2016 to reach the 2% inflation target. Japan has a floating exchange rate. How does this expansionary monetary policy affect the economy in the short run? How about the long run? Show graphically and explain. 2. Since the mid-1990s China maintained a close relationship between the Yuan and dollar. Below is a chart showing the Yuan to dollar exchange rate from 1981 through April 2015. Why do you think China followed this policy of a nearly fixed exchange rate? Under this traditional fixed exchange rate what is the impact of restricting imports in the short run and long run? 3. Over the last three years Mexico encountered a significant increase in violent crime and corruption in some government agencies. Investors are now more likely to view investment in parts of Mexico as increasingly risky. How would an increase in Mexico?s risk premium affect output interest rates and exchange rates in short run? Explain. Graphs are always welcome.

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