Question

In 1985, the exchange rate between the U.S. dollar and the Japanese yen was $1 = 262 yen; in 2003, the rate was $1 = 110 yen. Which one of the following might be a plausible explanation for the change in the dollar-yen exchange rate from 1985 to 2003?

Answer 1

Answer:

Japan exported much more to the United States during this period than it imported from the United States.

Explanation:

When a country's trade balance is positive, its currency tends to appreciate since foreign buyers want to purchase more domestic goods.

Since Japan has been consistently exporting more goods to the US than what they import from the US, American businesses need to buy more Japanese yens, than the amount of US dollars that Japanese businesses need. Therefore an increase in the demand of Japanese yens will need into a price increase of that currency.