Exchange Rates I: The Monetary Approach in the Long Run This question uses the general monetary model, in which L is no longer assumed constant and money demand is inversely related to the nominal interest rate. Consider two countries: Japan and South Korea. In 1996 Japan experienced relatively slow output growth, 1\%, whereas South Korea had relatively robust output growth, 6%. Suppose the Bank of Japan allowed the money supply to grow by 2% each year, whereas the Bank of Korea chose to maintain relatively high money growth of 15% per year. In addition, the bank deposits in Japan pay a 3% interest rate, iy =3%. For the following questions, use the general monetary model, in which L is a function of i. You will find it easiest to treat South Korea as the home country and Japan as the foreign country. Assuming that relative PPP holds, compute the nominal interest rate paid on South Korean deposits. a. South Korea's nominal interest rate: b. What is the real interest rate in South Korea? c. What is the real interest rate in Japan?