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

Question

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Under freely flexible exchange rates, market forces will cause the exchange rate to adjust in response to changes in supply and demand. If the U.S. trade deficit with Japan persists, it means that the U.S. is buying more Japanese goods than it is selling to Japan. As a result, there will be a greater demand for yen (to pay for the Japanese imports) relative to the supply of yen (from the Japanese who are not buying as much from the U.S.). This will lead to an increase in the price of yen in terms of dollars, i.e. an appreciation of the yen against the dollar.

Under Freely Flexible (Floating) Exchange Rates, a U