Question

The following questions concern the supply and demand for Japanese yen. The exchange rate is denoted as E_$/Yen. For each question state whether the supply of yen, demand for yen or both curves will shift, and in which direction.

a. Record Japanese audiences see the American film, Captain Marvel.

b. U.S. tax cuts increase U.S. GDP

c. The Japanese central bank lowers interest rates

d. Toyota introduces a new electric car that sells well in the U.S.

Answer 1

(a)

Record Japanese audiences see the American film, Captain Marvel

This will lead to record earning for US film company that has produced Captain Marvel.

As company will repatriate the earnings, it will supply yen to convert them into dollars.

So,

The supply of yen will increase and the supply curve of yen will shift to the right.

(b)

US tax cuts increase US GDP

Increase in US GDP will boost income of American residents.

This will increase the demand for imports by US residents.

This includes an increase in demand for Japanese goods as well.

So, US residents will demand yen to pay for it.

Thus,

The demand for yen will increase and demand curve for yen will shift to the right.

(c)

The Japanese central bank lowers interest rate.

This will lower the return on capital for investors and thus they will be induced to shift their capital elsewhere around the world.

So, investors will supply yen by liquidating their investments in Japan and will demand other foreign currencies for making investment elsewhere around the world.

Thus,

The supply of yen will increase and supply curve of yen will shift to the right.

(d)

Toyota introduces a new electric car that sells well in the US.

This will increase the earnings of Toyota. As Toyota will repatriate its earning, it will supply dollars and will demand yen.

So,

The demand for yen will increase and demand curve of yen will shift to the right.