Assume that Japan and the United States frequently trade with each other. Under a freely floating exchange rate system, high inflation in the United States will place ____ pressure on the Japanese yen, ____ the amount of Japanese yen available for sale, and result in ____ inflation in Japan.

Question

Quizplus · Accepted Answer

High inflation in the United States would lead to a depreciation of the US dollar, placing upward pressure on the Japanese yen as demand for yen increases. This would reduce the amount of yen available for sale, as people hold onto yen expecting it to appreciate. Inflation in Japan would remain unchanged initially, as the inflationary pressures are originating from the US.

Assume That Japan and the United States Frequently Trade with Each