If the equilibrium exchange rate between U.S.dollars and Japanese yen is $0.007 = 1 yen,but currently the exchange rate is $0.009 = 1 yen,then with flexible exchange rates the dollar price of a yen will __________,and the yen will __________.

Question

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Currently, the exchange rate of USD/JPY is $0.009 = 1 yen, which means that the dollar is overvalued compared to the yen. With flexible exchange rates, the dollar price of a yen will decrease to reach the equilibrium level, i.e., $0.007 = 1 yen. This implies that the yen will appreciate, as it can now buy more dollars than before. Therefore, the correct answer is D) decrease; depreciate.

If the Equilibrium Exchange Rate Between U