Question

Refer to following table, in which Q_d is the quantity of yen demanded, P is the dollar price of yen, Q_s is the quantity of yen supplied in year 1, and Q_s' is the quantity of yen supplied in year 2. All quantities are in billions.

Qd	P	Qs	Qs'
20	130	40	60
30	125	30	50
40	120	20	40
50	115	10	30

Assume that the exchange rate is fixed against the dollar at the equilibrium exchange rate that occurs in year 1. Also suppose that Japan and the Canada are the only two countries in the world.

In year 2, what quantity of yen would the Japanese government have to buy or sell to balance its capital and financial account with its current account?

Buy OR Sell ____bollion Yen?

In what specific account would this purchase or sale show up in Japan’s balance of payments statement?

Foreign purchases of assets in Japan OR Japanese purchase of assets abroad

Would this transaction increase Japan’s stock of official international reserves or decrease its stock?

Decrease OR Increase

Answer 1

Bn	Bn	Bn	Bn
Qd	P	Qs	Qs'
20	130	40	60
30	125	30	50
40	120	20	40
50	115	10	30
$1 =	6.5¥
Qd=	Yen Demand
P=	Price of Dollar in Yen
Qs=	Quantity of Yen supplied in Yr 1
Qs'=	Quantity of Yen supplied in Yr 2

In yr2 the equilibrium is $40bn.

There the quatity of Yen which Japanese Govt will have to buy to balance off it's payments would be 40bn X 6.5.

Buy 260bn Yen

This payment will show up in the Current A/c under Payment for Imports.

Purchase of Japanese Assets abroad would attract dollar inflow in the economy, which would ultimately increase the internal reserves. There would be a value of cost of goods & services sold for dollars. Apparently, it would look that production cost is Yen would equalise to dollar value but there would be a portion of profit inbuilt in sale vale, thereby bringing in reserves in economy.