Since early 1994, the exchange rate of the US $ for the Japanese Yen has changed from $1 = 80 Yen to $1 = 120 Yen (approximately)

Monday 30 November

Since early 1994, the exchange rate of the US $ for the Japanese Yen has changed from $1 = 80 Yen to $1 = 120 Yen (approximately). If this is so, ceteris paribus, then

1. If the Yen price of Japanese-made cars has not changed, US imports of Japanese made cars will tend to have

*a. increased in number b. decreased in number

c. increased in $ value but not in number

Consider a Japanese car that costs, say, 960,000 Yen. At 80 Yen = $1, its dollar price is (960,000/80) = $12,000. At 120 Yen = $1, its dollar price is (960,000/120) = $8,000. The dollar price has gone down, so sales should go up, i.e. US imports of those Japanese cars should increase.

2. The number of Japanese tourists visiting Disneyland will tend to have

a. increased in number *b. decreased in number c. not changed

Same kind of reasoning. Suppose it costs in total about $100/day to visit Disneyland. At 80 Yen =$1, that is 8,000 Yen a day; at 120 Yen = $1, 12,000 Yen a day. It is much more expensive in Yen, so you would expect the number of Japanese tourists to decrease.

3. Japanese financial institutions owning US treasury bonds will, in terms of Yen, have experienced [assume NO interest rate changes]

*a. a capital gain b. a capital loss

c. no change in Yen value of the bonds

Suppose they own $1 million of bonds. At 80 Yen = $1, that cost them 80 million Yen; but at 120 Yen = $1, the $1 million of bonds is now worth 120 million Yen; they made a nice fat capital gain in Yen.

4. A Japanese company that was considering building a factory in Alabama will see the investment, in terms of the Yen cost,

*a. costing more than before b. costing less than before

c. no change

Suppose the factory would cost $5 million. At 80 Yen = $1, that was 400 million Yen; but at 120 Yen = $1, it is 600 million Yen; the cost of the factory is more than it was before.

5. If oil is priced in dollars (as it is), other things equal the Yen price paid by Japan for oil imports will have

a. gone down *b. gone up c. not changed.

Suppose oil costs $15 a barrel; at 80 Yen = $1, that is 1,200 Yen; at 120 Yen = $1, it is 1,800 Yen. The Yen price of oil goes up even if the dollar price is unchanged.

In general, this kind of question is very easy: you just have to think through what has happened to the price in one currency when the price in the other is fixed, but the exchange rate (price of one currency in terms of the other) has changed, and then think through what the consequences of that price change are.