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i. If one U.S. dollar can purchase 105.8 Japanese yen, how many dollars would one Japanese yen purchase? If one euro will purchase $1.32, how many euros will one U.S. dollar purchase?

ii. Explain the relationship between the strength of the U.S. dollar and the rise or fall in exports and imports? If the U.S. dollar is strong relative to other currencies, would you expect the U.S. to run a current account deficit or surplus?

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Chika Ilonah
Chika IlonahLv10
28 Sep 2019

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Related questions

Please read the passage and answer the questions below.

During the first half of the 2000s, the Japanese yen was relatively weak against the U.S. dollar. This was a boon for Japan’s export-led economy. On January 1, 2008, it took 122 yen to buy one U.S. dollar. For the next four years, the yen strengthened relentlessly against the dollar, hitting a record high of ¥75.31 to the dollar on October 31, 2011. The reasons for the rise of the yen were complex and had little to do with the strength of the Japanese economy because there has been very little of that in evidence. The weakness of the yen during the early to mid-2000s was due to the so-called carry trade. This financial strategy involved borrowing in Japanese yen, where interest rates were close to zero, and investing the loans in higher-yielding assets, typically U.S. Treasury bills, which carried interest rates 3 to 4 percentage points greater. Investors made profits from the interest rate differential. At its peak, financial institutions had more than a trillion dollars invested in the carry trade. Because the strategy involved selling borrowed yen to purchase dollar-denominated assets, it drove the value of the yen lower. The interest rate differential existed because the Japanese economy was weak, prices were falling, and the Bank of Japan had been lowering interest rates in an attempt to boost growth and get Japan out of a dangerous deflationary cycle. When the global financial crisis hit in 2008 and 2009, the Federal Reserve in the United States responded by injecting liquidity into battered financial markets, effectively lowering U.S. interest rates on U.S. Treasury bonds. As these fell, the interest rate differential between Japanese and U.S. assets narrowed sharply, and the carry trade became unprofitable. Financial institutions unwound their positions, selling dollar-denominated assets, and buying yen to pay back their original loans. The increased demand drove up the value of the yen. For Japanese exporters, the 40 percent increase in the value of the yen against the dollar (and the euro) between early 2008 and 2012 was a painful experience. A strong yen hurts the price competitiveness of Japanese exports and reduces the value of profits earned overseas when translated back into yen. Take Toyota as an example: In February 2012, the company stated that its profit for the year ending March 31, 2012, would be about ¥200 billion, 51 percent lower than in the prior year. Toyota makes nearly half of the cars it sells globally at its Japanese plants, so it has been particularly hard hit by a rise in the value of the yen. In late 2012, things started to change when the pro-business Liberal Democratic Party won national elections and Shinzo Abe was appointed prime minister. Abe had campaigned on a platform that included taking actions to weaken the value of the yen to help Japan’s exporters. Even before the election, Japan’s central bank had accelerated purchases of government securities, thereby expanding the money supply, and had agreed to a higher inflation target. Under Abe’s leadership, this policy had explicit government support. One consequence of the policy was to reduce the value of the yen against other currencies. Indeed, between October 2012 and December 2013, the yen lost more than 25 percent of its value against the U.S. dollar. The yen was trading at ¥104 to the U.S. dollar in late December 2013. While this helped Japan’s exporters, the policy was criticized by other major industrial nations as a unilateral action that came dangerously close to precipitating a currency war.

1. Who in Japan benefits from the devaluation of the yen? Who does this hurt in Japan?

2. What does this case teach you about the way foreign exchange markets work?

1. ABC software, a small producer, decides to renovate its premises. Instead of hiring an outside contractor and tradespeople, the firm decides to use its employees---secretaries, programmers, sales staff, and others--to do most of the work. The firm makes all its employees try painting and carpentry and other tasks needed for the renovation and selects the people with the strongest skills in those areas to take time off their regular tasks and work on the renovation. Is the strategy a good one? Why or why not?

2. Suppose that one Euro can be exchanged for 1.3 U.S. dollars and that one U.S. dollar can be exchanged for 80 Japanese yen. If these currencies can be traded freely with low transaction costs, what exchange rate would you expect between the Euro and Japanese yen? Describe the transactions that would occur if the Euto-yen exchange rate is higher than this amount?

3. A government is considering a quota and a tariff, both of which will reduce imports by the same amount. Why might the government prefer one of these policies over the other?

1) "A balance of trade deficit must always be offset by net capital inflows from abroad." Agree or disagree with this statement and explain.

2) Suppose a Japanese firm buys a 1 year treasury bill with a face value of $10,000 today for $9400. If the value of the dollar declined from 90 to 80 yen during the year, what rate of return does the Japanese firm earn on its investment?

3) The treasurer of a U.S. firm noted that although short run deposits in Swiss bank accounts had earned the firm only a 3% annualized return when measured in Swiss francs, in dollars the firm had realized a 12% rate of return. Explain as precisely as possible how this was possible.

4) In recent years the exchange rate of the $ has been noticeably high against the yen. If for some reason investors around the world now decide that this increase is a temporary phenomena and that the $ will fall relative to the yen in coming months, what would be the effect on prices of U.S. Treasury Securities? Explain.

5) Do US producers of tradable goods prefer a strong dollar or a weak dollar in currency markets? Explain.

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