Question

Suppose the U.S. and Japan are the only two trading countries in the world. Will the U.S. dollar "Appreciate" or "Depreciate" based on the following events, other things equal? (You must respond by stating the dollar will either "Appreciate" or "Depreciate"). 1. Japan relaxes some of its import restrictions on American goods. 2. The U.S. economy slows down compared to the Japanese economy resulting in lower incomes for Americans. 3. Interest rates in the U.S. rise relative to interest rates offered in Japan. 4. inflation rises faster in Japan compared to the inflation in the U.S. 5. Japanese consumers decide to purchase fewer American cars but instead buy their own domestically produced cars.

Answer 1

(1) Dollar will appreciate.

Relaxation of Japanese imports from US will increase US export demand, increasing demand for dollar and appreciating dollar.

(2) Dollar will appreciate.

Lower US income will lower US import demand which will decrease the demand for Japanese Yen, depreciating Yen and appreciating dollar.

(3) Dollar will appreciate.

Higher US interest rate will attract more Japanese investment, increasing the demand for dollar, appreciating dollar.

(4) Dollar will appreciate.

Higher Japanese inflation rate will make US-made goods cheaper, so Japan will import more of US-made goods, increasing the demand for dollar, appreciating dollar.

(5) Dollar will depreciate.

Lower Japanese demand for US-made cars will decrease US exports, lowering the demand for dollar, depreciating dollar.