Under a system of floating exchange rates,a U.S.trade deficit with Japan will cause:
A) A flow of gold from the United States to Japan
B) The U.S.government to ration yen to U.S.importers
C) An increase in the dollar price of yen
D) A decrease in the dollar price of yen

Question

Quizplus · Accepted Answer

Under a system of floating exchange rates, a trade deficit implies excess demand for the foreign currency, in this case, yen. This excess demand will lead to an increase in the price of yen relative to the dollar, causing the dollar price of yen to increase. This will make imports from Japan more expensive for U.S. consumers and thus reduce the demand for Japanese goods, ultimately correcting the trade deficit. There is no automatic flow of gold or rationing of yen by the U.S. government under such a system.

Under a System of Floating Exchange Rates,a U