Question

if the equilibrium exchange rate between u.s. dollars and japanese yen is \\$0.008 = 1 yen, but currently the exchange rate is \\$0.007 = 1 yen, then with flexible exchange rates the dollar price of a yen will ______, and the dollar will ______.

• increase; depreciate
• increase; appreciate
• decrease; appreciate
• decrease; depreciate

Explanation:

Compare current and equilibrium rates

Using the Exchange Rate Adjustment knowledge point

$$
LATEXBLOCK0
$$

Determine the change in the dollar price of a yen

Using the Exchange Rate Adjustment knowledge point

$$
LATEXBLOCK1
$$

Determine the change in the value of the dollar

Using the Currency Depreciation Effects knowledge point

$$
LATEXBLOCK2
$$

Answer:

• (A) increase; depreciate (Correct answer)
• (B) increase; appreciate
• (C) decrease; appreciate
• (D) decrease; depreciate