Question

In 1985 the exchange rate between the U.S. dollar and the Japanese yen was $1 = 262 yen; in 1988, the exchange rate was $1 = 123 yen. Which of the following might be a plausible explanation for the change in the U.S. dollar-yen exchange rate given above?

A) Japan greatly increased its purchases of military equipment from the U.S. during this period
B) Japan's economy grew faster than the U.S. economy during this period
C) Interest rates in Japan fell relative to U.S. interest rates during this period
D) Japan exported far more to the U.S. during this period then it imported from the U.S.

Answer 1

Answer: Option (D) is correct.

Step-by-step explanation:

Correct option: Japan exported far more to the U.S. during this period then it imported from the U.S.

The demand for the Japanese goods was higher from the U.S. during that period that's why it exports more rather than imports. Now, for importing goods from Japan, U.S need more Japanese currency as a result demand for yen increases. This means that there is an appreciation of Japan currency .

So, there is an increase in the exchange rate between U.S and Japan during that period. There is an inflow of dollar from U.S to Japan, so the value of dollar reduces in terms of yen.