Question

 

1. 1. In 2012, Shinzo Abe became prime minister of Japan, promising bold policies to improve Japan's economy. What has been called "Abenomics" involved monetary policies designed to reduce the value of the Japanese Yen relative to other currencies. In the context of trade, what effect do you think this would have on the local Japanese economy?

   2. Since his election victory, President Donald Trump has been a vocal advocate of lowering interest rates, which the Federal Reserve has done on several occasions. What effect do you think these interest rate reductions have had on the strength of the US dollar when compared to other currencies? and hence the US economy?

   3. In 1979 the US central bank announced it will play a less active role in limiting the fluctuation of US dollar interest rates. After the enactment of this new policy, the exchange rate of the dollar to foreign currencies became more volatile. Are these two events connected? and if so, how would you explain the connection?

Answer 1

Devaluing Yen relative to other currencies will make Japanese products more competitive in the world since corresponding foreign currency cost will be lower for the consumer and will result in increase in exports for Japan at the same time imports will become costlier since Japanese will need to shell out more Yen for the corresponding foreign product and all this will result in decrease in imports so overall this will have positive impact on current account deficit

Interest rate reduction will increase the money supply and will promote Consumption and Corresponding demand since this will make money cheaper also corresponding impact will be that this make foreign direct investment less valuable and will result in the decrease in demand for USD and corresponding force it to devalue. Leading to rise in export and loss in imports with higher Consumption and also decrease investment

Yes earlier central bank was buying or selling USD in open market to avoid the price fluctuations but going forward when central bank stop controlling the prices this will lead to higher volatility in the currency market.