Sia
Question
Statistics
Posted 8 months ago
As a result of deficit spending, the government of Japan borrowed money in the market for loanable funds.
What happens to the exchange rate for the yen and Japanese exports as the result of the change in the market for loanable funds?
Choose 1 answer:
(A) Yen depreciates; exports decrease
(B) Yen appreciates; exports decrease
(C) Yen depreciates; exports increase
(D) Yen appreciates; Japanese exports are unaffected
(E) Yen doesn't change; Japanese exports don't change
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Answer from Sia
Posted 8 months ago
Solution by Steps
step 1
To understand the impact of deficit spending on the exchange rate and exports, we need to consider the effect of government borrowing on interest rates
step 2
When the government borrows in the market for loanable funds, it increases the demand for those funds
step 3
An increased demand for loanable funds tends to raise the interest rate
step 4
Higher interest rates attract foreign capital, increasing the demand for the yen
step 5
Increased demand for the yen leads to an appreciation of the currency
step 6
An appreciated yen makes Japanese exports more expensive to foreign buyers, potentially decreasing exports
Answer
B
Key Concept
Government borrowing and exchange rates
Explanation
Deficit spending by the government, which leads to borrowing in the market for loanable funds, typically results in higher interest rates that attract foreign investment, causing the domestic currency to appreciate and potentially decreasing exports due to higher prices for foreign buyers.
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