If the equilibrium exchange rate between U.S.dollars and Japanese yen is $0.008 = 1 yen,but currently the exchange rate is $0.007 = 1 yen,then with flexible exchange rates the dollar price of a yen will __________,and the dollar will __________.
A) increase; appreciate
B) decrease; appreciate
C) increase; depreciate
D) decrease; depreciate

Question

Quizplus · Accepted Answer

If the equilibrium exchange rate between U.S. dollars and Japanese yen is $0.008 = 1 yen, but the current exchange rate is $0.007 = 1 yen, it means that the U.S. dollar is undervalued relative to the Japanese yen. Thus, the dollar price of a yen should increase, which means the dollar should appreciate. Therefore, the correct answer is C: increase; depreciate.

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