We start with a 3 percent real interest rate in the United States and in Japan....
We start with a 3 percent real interest rate in the United States and in Japan. Next, the real interest rate in Japan falls to 2 percent, and the U.S. real interest remains constant. As a result,
A. the yen will appreciate, and the dollar will depreciate.
B. both the yen and the dollar will appreciate.
C. the yen will depreciate, and the dollar will appreciate.
D. both the yen and the dollar will depreciate.
Homework Answers
Reduction in interest rates in Japan, will make investment or savings in Japan less attractive from a foreign investor's point of view. It will decrease the demand for Japan's currency. So, price of Yen will decrease or we can say that Yen will depreciate.
Reduction in interest rate in Japan will increase the relative interest in US. So, we can say that dollar will appreciate.
Correct option is
C. the yen will depreciate, and the dollar will appreciate.
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