Question

Assuming a system of floating exchange rates between Japan and Australia, indicate whether each of the following would cause the Japanese yen and the AUD to appreciate or depreciate.

a. Australia unilaterally reduces tariffs on Japanese products.

b. Japan encounters severe inflation.

c. Deteriorating political relations reduce Japanese tourism in Australia.

d. The Australian government invites Japanese firms to invest in oil fields in Australia.

e. The rate of productivity growth in Australia diminishes sharply

Answer 1

statement	appreciate/ depreciate	reason
a. Australia unilaterally reduces tariffs on Japanese products.	AUD will depreciate	reduction on tariffs on japanese goods will increase the demand for goods in Australia so demand for yen will increase to make payments so AUD will depreciate
b. Japan encounters severe inflation.	Yen will depreciate	Inflation in japan will increase imports to counter high inflation in Japan , so yen depreciate
c. Deteriorating political relations reduce Japanese tourism in Australia.	AUD depreciate	Tourism can be considered as exports of services by Japan so reduced tourism will reduce the demand for Australian dollar so it will depreciate
d. The Australian government invites Japanese firms to invest in oil fields in Australia.	AUD Appreciate	This will increase demand for AUD so it will appreciate
e. The rate of productivity growth in Australia diminishes sharply	AUD depreciate	reduced productivity will cause reduced exports and increased imports so AUD will depreciate