Question

Assume Isuzu produces a car in Japan for ¥1.8 million. On June 1, when new models are introduced, the exchange rate is \150/USD. Consequently, the automaker sets the sticker price for the car at USD 12,000. By August 1, the exchange rate has dropped to ¥125/USD. Isuzu is worried that it will receive fewer Yen sale ($12,000 ~ 125 = ¥1.5 million). per

(a) What scenario(s) could explain the trajectory of the exchange rate? (3 points; 150 words)

Answer 1

Exchange rates dropped from Yen 150/USD to Yen125/USD means Yen became stronger than before. (or USD became weaker than before)

Few scenarios when this can happen:

1. Higher interest rates in Japan or low interest rates in USA. Higher interest rates will attract foreign capital.

2. Strong economic performance by Japan or weak economic performance by USA

3.  If the price of exports rises by a smaller rate than that of its imports, the currency's value will decrease in relation to its trading partners. This can be the case with USA here.

4.When inflation is low, and the GDP is growing at a healthy pace, it is a sign of a healthy economy. Foreign investors like to invest in such an economy. Which results in weakening or strengthening of an economy.