From 1980 to 2000, the yen/dollar exchange rate fell from 240 yen/dollar to 102

Question

From 1980 to 2000, the yen/dollar exchange rate fell from 240 yen/dollar to 102 yen/dollar, while the dollar/pound exchange rate fell from 2.22 dollars/pound to 1.62 dollars/pound. As a result,

A. the dollar depreciated relative to the yen, but appreciated relative to the pound

B. the dollar appreciated relative to the yen, but depreciated relative to the pound

C. the dollar appreciated relative to both the yen and the pound

D. the dollar depreciated relative to both the yen and the pound

Suppose purchasing power parity holds. If the price level in the United States is 100 dollars per good and the price level in Japan is 250 yen per good, then the nominal exchange rate is ________ yen per dollar.

A. .25

B. .4

C. 4

D. 2.5

Under a flexible exchange rates, rise in the domestic real interest rate would cause a ________ in net financial inflows and a ________ in the exchange rate (foreign currency relative to domestic currency).

A. fall; rise

B. rise; fall

C. fall; fall

D. rise; rise

Explanation / Answer

1. A. the dollar depreciated relative to the yen, but appreciated relative to the pound

Explanation:

In 1980, 1 dollar was worth 240 yen

In 2000, 1 dollar was worth 102 yen

So, the value of the dollar fell relative to that of yen i.e. the dollar depreciated relative to yen.

In 1980, 1 dollar was worth 1/2.22 pound i.e. 0.4504 pounds.

In 2000, 1 dollar was worth 1/1.62 pound i.e. 0.6172 pounds.

So, the value of the dollar rose relative to that of pound i.e. the dollar appreciated relative to the pound.

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