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.