Question

if the average income per u.s. worker decreases while that of japanese workers remains unchanged, then the demand curve for japanese yen will shift ______, which will cause the equilibrium exchange rate of the dollar price per yen to ____, which is the same thing as saying that the dollar will ______.

• rightward; rise; appreciate
• leftward; fall; depreciate
• rightward; rise; depreciate
• leftward; fall; appreciate

Explanation:

Analyze the impact of U.S. income changes on import demand

Using the Income Effects on Exchange Rates and Foreign Exchange Market knowledge points

• A decrease in the average income of U.S. workers reduces their purchasing power.
• Consequently, U.S. consumers will purchase fewer goods and services overall, including fewer imports from Japan.

Determine the shift in the demand for Japanese yen

Using the Currency Demand and Supply knowledge point

• Since U.S. demand for Japanese imports decreases, the demand by U.S. citizens for Japanese yen (needed to buy those imports) also decreases.
• A decrease in demand shifts the demand curve for Japanese yen to the left (leftward).

Determine the change in the equilibrium exchange rate

Using the Foreign Exchange Equilibrium knowledge point

• A leftward shift in the demand curve for yen, with the supply of yen remaining unchanged, leads to a lower equilibrium price of yen.
• Therefore, the dollar price per yen (the exchange rate) will fall.

Analyze the effect on the value of the U.S. dollar

Using the Currency Depreciation Effects knowledge point

• A decrease in the dollar price per yen means that fewer dollars are needed to purchase one yen.
• This indicates that the purchasing power of the dollar relative to the yen has increased, meaning the dollar will appreciate.

Match the findings to the given options

• The three blanks should be filled with: "leftward", "fall", and "appreciate".
• This corresponds to the option: "leftward; fall; appreciate".

Answer:

• rightward; rise; appreciate
• leftward; fall; depreciate
• rightward; rise; depreciate
• leftward; fall; appreciate (Correct answer)