Question

exchange rate and purchasing power quick check
one u.s. dollar trades for 110 yen. which of the following correctly explains the effect on japanese automobile prices for holders of u.s. dollars if the u.s. dollar appreciated relative to the yen?
(1 point)

• since one u.s. dollar is worth fewer yen, japanese automobiles are relatively more expensive to holders of u.s. dollars.
• since one u.s. dollar is worth more yen, japanese automobiles are relatively more expensive to holders of u.s. dollars.
• since one u.s. dollar is worth more yen, japanese automobiles are relatively less expensive to holders of u.s. dollars.
• since one u.s. dollar is worth fewer yen, japanese automobiles are relatively less expensive to holders of u.s. dollars.

Explanation:

1. Recall the concept of currency appreciation: When the U.S. dollar appreciates relative to the yen, one U.S. dollar can buy more yen (e.g., if originally 1 USD = 110 yen, after appreciation, 1 USD might = 120 yen).
2. Analyze the effect on Japanese automobile prices for U.S. dollar holders: Japanese automobiles are priced in yen. If 1 USD buys more yen, then for a given price of a Japanese automobile (in yen), the amount of USD needed to buy it decreases. So Japanese automobiles become relatively less expensive for U.S. dollar holders.
3. Eliminate incorrect options:

• Options with "one U.S. dollar is worth fewer yen" are wrong because appreciation means a dollar is worth more yen, not fewer.
• The option saying automobiles are more expensive is wrong because with more yen per dollar, the dollar can buy more yen - denominated goods, making them cheaper for dollar holders.

Answer:

C. Since one U.S. dollar is worth more yen, Japanese automobiles are relatively less expensive to holders of U.S. dollars.