How will contractionary monetary policy in Japan affect the demand for yen and the supply of yen in the foreign exchange market?
A)The demand for yen will fall, and the supply of yen will increase.
B)The demand for yen will increase, and the supply of yen will fall.
C)The demand for yen will fall, and the supply of yen will fall.
D)The demand for yen will increase, and the supply of yen will increase.

Question

Quizplus · Accepted Answer

Contractionary monetary policy in Japan typically involves increasing interest rates or reducing the money supply, which makes holding yen more attractive due to higher returns on yen-denominated assets. This increases the demand for yen as investors seek to benefit from the higher interest rates. At the same time, the higher interest rates make borrowing in yen more expensive, reducing the incentive for speculative or investment activities that would increase the supply of yen in the foreign exchange market. Thus, the demand for yen increases while the supply falls.

How Will Contractionary Monetary Policy in Japan Affect the Demand