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Microeconomics

13th Edition
Roger A. Arnold
ISBN: 9781337617406

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BuyFindarrow_forward

Microeconomics

13th Edition
Roger A. Arnold
ISBN: 9781337617406
Textbook Problem

Suppose the United States and Japan have a flexible exchange rate system. Explain whether each of the following events will lead to an appreciation or depreciation of the U.S. dollar and Japanese yen:

  1. a. U.S. real interest rates rise above Japanese real interest rates.
  2. b. The Japanese inflation rate rises relative to the U.S. inflation rate.
  3. c. An increase in U.S. income combines with no change in Japanese income.

(a)

To determine

Determine whether it is appreciation or depreciation when the U.S. interest rate is above the Japanese interest rate.

Explanation

When the real interest rate of U.S. increases above the real interest rate of Japan, the investors in Japan will invest in U.S. by purchasing the U.S. financial assets in order to earn a high rate of return...

(b)

To determine

Determine whether it is appreciation or depreciation when the rate of inflation rises in relation to the U.S. inflation rate.

(c)

To determine

Determine whether it is appreciation or depreciation when there is an increase in U.S. income while no change in Japanese income.

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