Chapter 19, Problem 1CQ

To determine

Depreciation of the US dollar with Yen and its effect on Country J’s product and its demand.

Explanation of Solution

The exchange rate is the rate at which the currencies are traded with each other. It can be considered as the quantity of one currency to be paid in order to obtain one unit of the foreign currency in the currency exchange market. In this case, when the dollar depreciates relative to Yen, it means that the dollar has lost its value against the Yen. Thus, more US dollar is needed to be paid in order to get a Yen in exchange.

Hence, as the Dollar depreciates relative to Yen, the purchasing power of dollar declines and as a result, more quantity of dollar will be required to purchase the camera produced by Country J. This increases the price of the camera in the Country U’s economy and as a result of this, the demand for Country J’s camera would decline in Country U.

Economics Concept Introduction

Exchange rate: The exchange rate is the rate at which a domestic currency is exchanged with an international currency in a currency exchange market.