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The demand for yen in exchange for dollars will increase​ if, ceteris​ paribus: a. the desirability of investing in Japan falls. b. speculators think the value of the yen relative to the dollar will fall. c. Japanese interest rates increase relative to interest rates in other countries. d. income in Australia falls.

Question

The demand for yen in exchange for dollars will increase​ if, ceteris​ paribus:

a. the desirability of investing in Japan falls.

b. speculators think the value of the yen relative to the dollar will fall.

c. Japanese interest rates increase relative to interest rates in other countries.

d. income in Australia falls.

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Solution

The demand for yen in exchange for dollars will increase if, ceteris paribus:

a. This statement is incorrect. If the desirability of investing in Japan falls, the demand for yen would decrease, not increase. This is because less foreign capital would be flowing into Japan, reducing the need for foreign investors to exchange their home currency for yen.

b. This statement is also incorrect. If speculators think the value of the yen relative to the dollar will fall, they would be more likely to sell yen in exchange for dollars, not buy more yen. This would decrease the demand for yen.

c. This statement is correct. If Japanese interest rates increase relative to interest rates in other countries, it would make Japanese investments more attractive. This would increase the demand for yen as foreign investors exchange their home currency for yen to invest in Japan.

d. This statement is not directly related to the demand for yen in exchange for dollars. A fall in income in Australia might affect the demand for yen if Australians were significant investors in Japan, but the question does not provide enough information to determine this. Therefore, we cannot definitively say whether this would increase or decrease the demand for yen.

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