Using demand and supply analysis, answer the following questions. What are the effects on the exchange rate between the British pound and the Japanese yen from:
a. An increase in Japanese interest rates
b. An increase in the price of British goods
c. An increase in British interest rates
To analyze the effects on the exchange rate between the British pound (GBP) and the Japanese yen (JPY) using demand and supply analysis, we need to consider the impact of each factor on the demand and supply of these currencies.
a. An increase in Japanese interest rates:
Higher interest rates in Japan would attract foreign investors, as they would expect higher returns on their investments. This would increase the demand for Japanese yen. As a result, the demand curve for yen would shift to the right. On the other hand, the supply of yen remains unaffected. This increase in demand and unchanged supply would put upward pressure on the value of the yen relative to the pound, causing the exchange rate to appreciate for JPY/GBP.
b. An increase in the price of British goods:
If the price of British goods increases, it becomes relatively more expensive for foreign consumers, including those in Japan, to purchase British goods. As a result, the demand for British pounds decreases. This decrease in demand would cause the demand curve for pounds to shift to the left. At the same time, the supply of pounds remains unchanged. The decrease in demand and unchanged supply would put downward pressure on the value of the pound relative to the yen, causing the exchange rate to depreciate for GBP/JPY.
c. An increase in British interest rates:
Higher interest rates in the UK would attract foreign investors, as they would expect higher returns on their investments. This would increase the demand for British pounds. As a result, the demand curve for pounds would shift to the right. In this case, the supply of pounds remains unaffected. This increase in demand and unchanged supply would put upward pressure on the value of the pound relative to the yen, causing the exchange rate to appreciate for GBP/JPY.
It is important to note that in real-world scenarios, the exchange rates are influenced by a wide range of factors beyond just interest rates and prices, such as economic indicators, market speculation, political events, and government intervention. Therefore, while demand and supply analysis provides a theoretical framework, actual exchange rate movements may be more complex.