1) Why does Japan’s “widening interest rate gap with the United States” result in the “yen’s depreciation against the dollar”?
As Japan’s interest rate differential becomes more negative, the demand for yen __________, the supply of yen ___________, and the yen depreciates.
Wrong! - As Japan’s interest rate differential becomes more negative, how does the demand for Japan’s assets change? How does this influence the demand for yen? Does the number of people who want to keep their funds in yen change? How does this influence the supply of yen?
Well Done! - As Japan’s interest rate differential becomes more negative, the demand for Japan’s assets decreases and the demand for yen decreases. Fewer people want to keep their funds in yen and the supply of yen increases. When the demand for yen decreases and the supply of yen increases, the yen depreciates.
