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In the flexible exchange rate system, discuss the effects of the following events on the exchange rate between U.S. dollar and Japanese Yen: Please indicate whether US$ will appreciate or depreciate.

A) Other things being equal, the trade deficit between U.S. and Japan increased, or the U.S. imports from Japan increased faster than U.S. exports to Japan.

B) Other things being equal, the U.S. real interest rate increased faster than Japanese real interest rate.

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Solution Summary

This solution describes how a change in the U.S./Japan trade deficit and a change in real interest rates would affect the dollar/yen exchange rate.

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A) Americans will want to buy more yen so they can pay for the imports. The demand for Japanese yen ...

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