Question

Singapore and Japan are trading partners. The Japanese economy is operating at full employment, and Japan’s current account balance is zero.

a. Assume the exchange rate between the Singapore dollar (SGD) and the Japanese yen (JPY) changes from 1 SGD = 82 JPY to 1 SGD = 65 JPY. Does the JPY appreciate or depreciate against the SGD?
b. Given your answer in part (a), will each of the following increase, decrease, or remain the same?
i. The price of Japanese goods in Singapore dollars
ii. Japan’s net exports
c. Draw a single correctly labeled graph with the long-run Phillips curve and short-run Phillips curve for Japan. On the graph, show the new short-run equilibrium as a result of the change in Japan’s net exports from part (b)(ii), labeled point X.
d. Given your answer in part (b)(ii), will each of the following be in deficit, surplus, or zero for Japan?
i. Current account balance
ii. Financial (capital) account balance

Answer 1

Hope this helps! To many questions to fit into the answer box here, But there is a lengthy description below!

Step-by-step explanation:

a. The JPY appreciates against the SGD because the exchange rate between the two currencies has decreased (1 SGD = 65 JPY), which means that the value of the JPY has increased relative to the SGD.

b. i. The price of Japanese goods in Singapore dollars will decrease because the value of the JPY has increased relative to the SGD, which means that Singapore dollars will be worth more in terms of JPY.

ii. Japan's net exports will increase because the appreciation of the JPY makes Japanese goods cheaper in terms of foreign currencies, which will increase demand for Japanese exports.

c. The short-run Phillips curve for Japan slopes upward because an increase in demand for Japanese goods (resulting from an increase in net exports) will lead to an increase in the level of employment and inflation in the short run. The long-run Phillips curve is vertical because, in the long run, any increase in demand will only lead to a temporary increase in employment and inflation. The new short-run equilibrium as a result of the change in Japan's net exports is shown as point X on the graph.

d. i. The current account balance will be in surplus because Japan's net exports have increased, which means that Japan is exporting more goods and services than it is importing.

ii. The financial (capital) account balance will be in surplus because an increase in net exports means that Japan is earning more foreign currency from its exports, which it can then use to buy foreign assets.