Question

Assume that a Japanese car manufacturer exports cars to U.S. dealerships, which are priced in yen. The demand for those cars declines when the yen is strong. The manufacturer also produces some cars in the U.S. with U.S. materials and those cars are priced in dollars. The manufacturer could reduce its economic exposure by: pricing its exports in dollars. relying completely on Japanese suppliers for its parts. producing more automobiles in the United States. closing down most of its plants in the United States.

Answer 1

The manufacturer could reduce its economic exposure by:

"producing more automobiles in the United States."

This is because when yen is strong and demand for cars manufactured in Japan declines then that decline can be compensated by higher production of cars in the United States.

Pricing its exports in dollars will not work because firm will convert price of car in yen using spot exchange rate. so, when Yen is strong then converted dollar price will also be higher as strong yen will get more no. of units of dollars compared to when it's weak.

relying completely on Japanese suppliers for its parts will also not work because when yen is strong purchase of parts from Japanese suppliers by plants in United States will be expansive and will increase the price of cars in dollars.

closing down most of its plants in the United States will reduce firm's revenue, earnings and growth.