[Anonymous]

I’m having trouble understanding how to figure out if one currency is appreciating or depreciating to the other currency after the exchange rate changes.

Let’s the US dollar is 1 and the Yen is 1.23, later in the year the US dollar is 1 and the Yen is 1.45. Has the dollar appreciated/depreciated in this example?

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What is the effect on prices of U.S. imports and exports when the dollar depreciates?

A.

Import prices and export prices will decrease.

B.

Import prices will decrease and export prices will increase.

Correct C.

Import prices will increase and export prices will decrease.

D.

Import prices and export prices will increase.

Exchange rates are determined by the interaction of supply and demand for the various foreign currencies in foreign exchange markets. If the demand for a nation’s currency increases, the price of the currency will appreciate. If a currency appreciates, it increases in value in terms of the other currencies. In this instance, if the yen were to appreciate, it would take fewer yen to buy a dollar. For example, as the yen appreciates, the exchange rate might fall to $1 = 110 yen. This would make Japanese exports more expensive for American consumers. If the supply of the nation’s currency increases, the price of the currency will depreciate, or decline in value in terms of other currencies.

The provided solution to the question above seems counter intuitive to me.