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    appreciation of the US dollar

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    As the U.S. dollar appreciates in value relative to the Japanese Yen, what happens to the price of U.S. goods in Japan? What happens to the price of Japanese goods in the U.S.?

    Why would a country (for example China) choose to keep their currency relatively pegged to the U.S. dollar?

    If the U.S. dollar were to appreciate considerably against most currencies, what would be the effect on Chinese exports to countries other than the U.S.?

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    Solution Preview

    We say that a currency is appreciating when its value rises relative to the value of other currencies. We say that a currency depreciates when its value falls relative to the value of some other currency. When one currency appreciates the other one automatically depreciates.

    As an example suppose each US dollar (USD) is trading for 100 Japanese yen (JPY). If the exchange rate changes to 1 USD = 120 JPY, then we say the dollar has appreciated, and the yen has depreciated. On the other hand, if the exchange rate changes to 1 USD = 80 JPY, then we say that the dollar has depreciated and the yen has appreciated.

    Consider a car made in the US that sells for $10000, and one made in Japan that sells for 1000000 JPY. Suppose the exchange rate is 1 USD = 100 JPY, then the price of the Japanese car in the US is 1000000/100 = ...

    Solution Summary

    Money change example problem is illustrated in this tutorial.