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Yen Sinks After Japan’s PM Resigns

EconEye Admin

The yen fell broadly against the U.S. dollar, the euro, and the pound on Monday after the Prime Minister’s resignation, as investors anticipated a successor favoring looser monetary policies.—reuters.com

 

Answer the following questions to check your understanding of the story.

1) What is “looser” monetary policy and what is its effect?

When the central bank implements “looser” monetary policy, ________________.

Wrong! - “Looser” monetary policy is expansionary monetary policy. How do interest rates change? Does the demand for money change?

Well Done! - “Looser” monetary policy is expansionary monetary policy. The quantity of money increases, interest rates fall, and aggregate demand increases. Real GDP increases and the price level rises.

2) How do expectations of the Bank of Japan pursuing looser monetary policies influence the expected future exchange rate of the yen?

The expected future exchange rate of the yen __________.

Wrong! - As interest rates in Japan fall, what happens to the Japanese interest rate differential and the expected future exchange rate of the yen?

Good Job! - As interest rates in Japan fall, the Japanese interest rate differential decreases, and the expected future exchange rate of the yen falls.

3) Why did the yen depreciate?

The yen depreciated because the expected profit from holding yen fell, which ___________ the demand for yen and ___________ the supply of yen.

Wrong! - When the expected profit from holding yen falls, people want to hold fewer yen. How do the supply of yen and the demand for yen change?

Correct! - When the expected profit from holding yen falls, people want to hold fewer yen. The demand for yen decreases, the supply of yen increases, and the yen depreciates.

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