The exchange rate between the U.S. dollar and the Japanese yen is floating freely—both governments… 1 answer below »

The exchange rate between the U.S. dollar and the Japanese yen
is floating freely—both governments do not intervene in the
market for each currency. Suppose a large trade deficit with
Japan prompts the United States to impose quotas on certain
Japanese products imported into the United States and, as a
result, the quantity of these imports falls.
a. The decrease in spending on Japanese products increases
spending on U.S.-made goods.Why? What effect will this
have on U.S. output and employment and on Japanese output
and employment?
b. What happens to U.S. imports from Japan when U.S. output
(or income) rises? If the quotas initially reduce imports from
Japan by $25 billion, why is the final reduction in imports
likely to be less than $25 billion?
c. Suppose the quotas do succeed in reducing imports from Japan
by $15 billion.What will happen to the demand for yen? Why?
d. What will happen to the dollar–yen exchange rate? Why?
(Hint: There is an excess supply of yen, or an excess demand
for dollars.) What effects will the change in the value of each
currency have on employment and output in the United
States? What about the balance of trade? (Ignore complications
such as the J curve.)
e. Considering the macroeconomic effects of a quota on
Japanese imports, could a quota reduce employment and
output in the United States? have no effect at all? Explain.

 

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