Under ﬂexible (ﬂoating) exchange rates, a U.S. trade deﬁcit with Japan will eventually cause the
dollar price of yen to rise.

Question

Quizplus · Accepted Answer

In a flexible exchange rate system, the exchange rate is determined by market supply and demand. If there is a trade deficit between the US and Japan, this means the US is importing more goods and services from Japan than it is exporting to Japan. As a result, there will be a higher demand for yen from US buyers, and therefore the price of yen will rise relative to the dollar. This is an example of how a flexible exchange rate system can help to correct trade imbalances between countries.

Under ﬂExible (ﬂOating) Exchange Rates, a U