Which of the following situations is most likely to strengthen the yen's value against the dollar? Assume everything else is held constant.
A) a reduction in U.S. inflation accompanied by an increase in Japan's inflation
B) a reduction in U.S. inflation accompanied by an increase in U.S. interest rates
C) an increase in U.S. inflation accompanied by no change in U.S. nominal interest rates
D) a reduction in Japan's inflation accompanied by an increase in Japan's interest rates

Question

Which of the following situations is most likely to strengthen the yen's value against the dollar? Assume everything else is held constant.​
A) ​a reduction in U.S. inflation accompanied by an increase in Japan's inflation
B) ​a reduction in U.S. inflation accompanied by an increase in U.S. interest rates
C) ​an increase in U.S. inflation accompanied by no change in U.S. nominal interest rates
D) ​a reduction in Japan's inflation accompanied by an increase in Japan's interest rates

Quizplus · Accepted Answer

A reduction in Japan's inflation accompanied by an increase in Japan's interest rates would likely strengthen the yen against the dollar. Lower inflation in Japan makes the yen more valuable, while higher interest rates attract foreign capital, increasing demand for the yen.

Which of the Following Situations Is Most Likely to Strengthen