Consider two countries: Japan and Korea. In 1996 Japan experienced relatively slow output growth (1%), while Korea had relatively robust output growth (6%). Suppose the Bank of Japan allowed the money supply to grow by 2% each year, while the Bank of Korea chose to maintain relatively high money growth of 12% per year.

For the following problems, use the simple monetary model (where L is constant). You will find it easiest to treat Korea as the home coun- try and Japan as the foreign country.

Suppose the Bank of Korea wants to main- tain an exchange rate peg with the Japanese yen. What money growth rate would the Bank of Korea have to choose to keep the value of the won fixed relative to the yen?

Suppose the Bank of Korea sought to im- plement policy that would cause the Ko- rean won to appreciate relative to the Japanese yen. What ranges of the money growth rate (assuming positive values) would allow the Bank of Korea to achieve this objective?