Suppose the exchange rate is initially set at 120 yen per dollar and increases to 140 yen per dollar.In the U.S.economy this would be expected to

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As the value of the dollar increases relative to the yen, it becomes more expensive for Japanese consumers to purchase American goods and therefore, U.S. exports decrease. At the same time, it becomes cheaper for Americans to import Japanese goods, and therefore, U.S. imports increase. This leads to an increase in the U.S. trade deficit (or a decrease in the trade surplus).

Suppose the Exchange Rate Is Initially Set at 120 Yen