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Six scenarios, value of dollar relative to the Japanese yen.

For each of the following six scenarios, say whether the value of the dollar will appreciate, depreciate, or remain the same relative to the Japanese yen. Explain each answer. Assume that exchange rates are free to vary and that other factors are held constant.

a. The growth rate of national income is higher in the United States than in Japan.

b. Inflation is higher in the U.S. than in Japan.

c. Prices in Japan and the United States are rising at the same rate.

d. Real interest rates are higher in the United States than in Japan.

e. The United States imposes new restrictions on the ability of foreigners to buy American companies and real estate.

f. U.S. wages rise relative to Japanese wages, and American productivity falls behind Japanese productivity.

Solution Preview

a. The growth rate of national income is higher in the United States than in Japan.

The value of the dollar should rise as more rapidly rising GNP in the United States leads to a relative increase in demand for dollars.

b. Inflation is higher in the U.S. than in Japan.

The value of the dollar should fall in line with purchasing power parity.

c. Prices in Japan and the United States are rising at ...

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