Given a two-country world, suppose Japan devalues the yen by 20 percent and South Korea devalues the won by 15 percent.Other things equal, this results in
A) an appreciation in the value of both currencies.
B) a depreciation in the value of both currencies.
C) an appreciation in the value of the yen against the won.
D) a depreciation in the value of the yen against the won.

Question

Quizplus · Accepted Answer

Devaluation of a country's currency makes its exports cheaper and more attractive, leading to an increase in demand for it. This will result in an increase in the country's production, shifting its production possibilities frontier (PPF) outward. Since both Japan and South Korea devalue their currencies, their relative exchange rate remains the same, and there will be no appreciation or depreciation of both currencies against each other. However, since Japan's currency is devalued by a higher percentage than South Korea's currency, Japan's exports become relatively cheaper, resulting in an increased demand for Japanese goods in South Korea. This will shift Japan's PPF outward relative to South Korea's PPF. Therefore, the answer is (D) a depreciation in the value of the yen against the won.

Given a Two-Country World, Suppose Japan Devalues the Yen by 20