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Suppose the dollar is currently worth 110 yen. Based on trade flows and inflation, if the U.S. trade deficit with Japan continues, and if U.S. inflation rates exceed those in Japan which one of the following could be the correct result?

A. the yen is likely to appreciate to 120 yen per dollar.
B. the yen is likely to depreciate to 100 yen per dollar.
C. the yen is likely to depreciate to 120 yen per dollar.
D. the yen is likely to appreciate to 100 yen per dollar

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Answer:

The yen is likely to depreciate to 120 yen per dollar.

Explanation:

Reason: Rate if inflation indirectly affects the exchange rate. A higher inflation rate would lead to higher interest rate in US thereby becoming an attractive destination for foreign capital thereby leading to appreciation in Home currency i.e USD in present case.

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