Question

multiple choice 2 points

if real interest rates in japan fall relative to real interest rates in the united states, the yen will likely ______ in terms of the dollar and the dollar will likely ______ in terms of the yen.

remain unaffected; remain unaffected
appreciate; depreciate
remain unaffected; appreciate
depreciate; appreciate

Explanation:

Analyze the impact of relative interest rate changes

When real interest rates in Japan fall relative to real interest rates in the United States, financial assets in the United States become more attractive to investors seeking higher returns. Consequently, financial capital flows out of Japan and into the United States.

Determine the effect on the Japanese yen

To invest in US assets, investors must sell Japanese yen and buy US dollars. This increases the supply of yen in the foreign exchange market and decreases the demand for yen. As a result, the yen will likely depreciate in terms of the dollar. This process demonstrates Exchange Rate Adjustment and leads to Currency Depreciation Effects.

Determine the effect on the US dollar

Conversely, the demand for US dollars increases as investors convert their currency to purchase US assets. This increased demand causes the US dollar to appreciate in terms of the Japanese yen.

Match with the correct option

Combining these two outcomes:

• The yen will likely depreciate in terms of the dollar.
• The dollar will likely appreciate in terms of the yen.

This corresponds to the option "depreciate; appreciate".

Answer:

• remain unaffected; remain unaffected
• appreciate; depreciate
• remain unaffected; appreciate
• depreciate; appreciate (Correct answer)