Under a system of floating exchange rates, other things equal, a U.S.trade deficit with Japan will cause
A) a flow of gold from the United States to Japan.
B) the U.S. government to ration yen to U.S. importers.
C) an increase in the dollar price of yen.
D) a decrease in the dollar price of yen.

Question

Quizplus · Accepted Answer

Under a system of floating exchange rates, a U.S. trade deficit with Japan means that there is an excess demand for yen relative to the supply of dollars. As a result, the value of the yen will appreciate (i.e. the dollar price of yen will increase) to balance the market.

Under a System of Floating Exchange Rates, Other Things Equal