Question

4 multiple choice 2 points
if the equilibrium exchange rate between u.s. dollars and japanese yen is \\$0.01 = 1 yen, but currently the exchange rate is \\$0.009 = 1 yen, then with flexible exchange rates the dollar price of a yen will ____ and the yen will ____.

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

5 multiple choice 2 points
if the u.s. dollar depreciates in the foreign exchange market, u.s. exports will be ____ and u.s. imports will be ____.

relatively less expensive; relatively more expensive
relatively more expensive; relatively more expensive
relatively more expensive; relatively less expensive
relatively less expensive; relatively less expensive

Explanation:

Analyze exchange rate adjustment

The equilibrium exchange rate is \( \$0.01 = 1\text{ yen} \).
The current exchange rate is \( \$0.009 = 1\text{ yen} \).
Since \( \$0.009 < \$0.01 \), the current dollar price of a yen is below equilibrium.
Under flexible exchange rates, market forces will push the dollar price of a yen up toward equilibrium.
Therefore, the dollar price of a yen will increase.
As the dollar price of a yen increases, it takes more dollars to buy one yen, meaning the yen is gaining value.
Thus, the yen will appreciate.

Analyze effects of dollar depreciation

When the U.S. dollar depreciates, it loses value relative to foreign currencies.
Foreign buyers need fewer units of their currency to purchase one U.S. dollar.
This makes U.S. goods cheaper for foreign consumers, so U.S. exports become relatively less expensive.
Conversely, U.S. buyers need more dollars to purchase the same amount of foreign currency.
This makes foreign goods costlier for U.S. consumers, so U.S. imports become relatively more expensive.

Answer:

Question 4

• increase; depreciate
• decrease; depreciate
• increase; appreciate (Correct answer)
• decrease; appreciate

Question 5

• relatively less expensive; relatively more expensive (Correct answer)
• relatively more expensive; relatively more expensive
• relatively more expensive; relatively less expensive
• relatively less expensive; relatively less expensive