9*.[4 points] Let Sdenotes the nominal exchange rate between the U.S. dollar and

Question

9*.[4 points] Let Sdenotes the nominal exchange rate between the U.S. dollar and Japanese yen. Show that an increase in the Japan's real exchange rate, S"real^(say over one year time period) will make Japan less competitive in international trade with U.S. and lowers the cost of U.S. goods for Japanese. Use a numerical example to support your answers. (Hint: Assume a constant nominal exchange rate in two periods, assume CPls Of 100 for both counties at initial time, assume different CPls for terminal period)

Explanation / Answer

A) Real exchange rate represents the rate at which domestic goods and services can be traded. A decrease in real interest rate of Japan will make Japanese Yen to depreciate relative to U.S dollar. A depreciation of the Japanese yen (relative to U.S dollar) means, goods produced in Japan will become cheaper relative to American goods (All else equal). This makes Japan more competetive than U.S. In the same way Increase in the real exchange rate of Japan, makes it less competitive than U.S

The main logic here is increase in the interest rate will make currency more expensive and less competetive. Conversely a decrease in the real interest rate will make currency less expensive and more competetive.

So an Increase in real interest rate of Japan will make it more expensive and less competetive.

(Major point here is the concept which is explained above. No calcualtions are required)

Related Questions

Navigate

• Browse (All)
• Browse 9
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.