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Chapter 18: Q. 8 (page 495)

In the mid- to late 1970s, the yen appreciated in value relative to the dollar, even though Japan’s inflation rate was higher than America’s. How can this be explained by improvements in the productivity of Japanese industry relative to U.S. industry?

Short Answer

Expert verified

Because of the high value of the yen, the Japanese could continue to provide their products at a discount because of their increased utility in comparison to American efficiency.

Step by step solution

01

Concept Introduction 

Money appreciation refers to the increase in the value of one currency as compared to another in the forex markets.

02

Explanation 

Despite the fact that Japanese costs increased in comparison to American costs, the yen appreciated because the increase in Japanese efficiency compared to American efficiency allowed the Japanese to continue offering their goods at a discount due to the yen's high value.

03

Final Answer 

Because of the high value of the yen, the Japanese could continue to provide their products at a discount because of their increased efficiency in comparison to American efficiency.

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Most popular questions from this chapter

Go to the St. Louis Federal Reserve FRED database, and find data on the exchange rate of U.S. dollars per British pound (DEXUSUK). A Mini Cooper can be purchased in London, England, for£17,865orinBoston,UnitedStates,for$23,495.

a. Use the most recent exchange rate available to calculate the real exchange rate of the London Mini per Boston Mini.

b. Based on your answer to part (a), are Mini Coopers relatively more expensive in Boston or in London?

c. What price in British pounds would make the Mini Cooper equally expensive in both locations, all else being equal?

Suppose the president of the United States announces a new set of reforms that includes a new anti-inflation program. Assuming the announcement is believed by the public, what will happen to the exchange rate on the U.S. dollar.

Go to the website that contains the most recent calculations of the Economist’s Big Mac Index, http://www .economist.com/content/big-mac-index.

a. Plot the relationship between the local price of a Big Mac and the actual exchange rate. Does this plot suggest that there is a close relationship between the local price and the actual exchange rate? Does this suggest that the theory of PPP has some validity? Explain why.

b. Does your evidence above indicate that PPP is a good theory for exchange rates in the short run?

c. Which country’s currency is the most overvalued in terms of purchasing power parity? Is it expensive or cheap to shop there?

d. Which country’s currency is the most undervalued in terms of purchasing power parity? Is it expensive or cheap to shop there?

If nominal interest rates in America rise but real interest rates fall, predict what will happen to the U.S. dollar exchange rate.

If the Indian government unexpectedly announces that it will be imposing higher tariffs on foreign goods one year from now, what will happen to the value of the Indian rupee today?
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