Suppose the exchange rate is initially set at 120 yen per dollar and increases to 140 yen per dollar.In the U.S.economy this would be expected to

A) increase the U.S.trade deficit (or decrease the trade surplus) .
B) decrease the U.S.trade deficit (or increase the trade surplus) .
C) increase the U.S.trade deficit only if exports change by more than imports.
D) leave the U.S.trade deficit unchanged.
E) decrease the U.S.trade deficit only if exports change by more than imports.

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Abigail Doyle · Accepted Answer

Final Answer : A, Explanation :  As the value of the dollar increases relative to the yen, it becomes more expensive for Japanese consumers to purchase American goods and therefore, U.S. exports decrease. At the same time, it becomes cheaper for Americans to import Japanese goods, and therefore, U.S. imports increase. This leads to an increase in the U.S. trade deficit (or a decrease in the trade surplus).

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