1. Explain what would happen if the yuan did rise against the dollar.

As explained in the article, deflation has been a way of life for the Japanese people for some time. As they adjusted to lower wages, they had less money to spend and aggregate domestic consumption became a small part of total output relative to exports. Deflation also contributed to reduced consumption. Although conventional wisdom says to by more at lower prices, prices just kept going down and people put off buying, thinking prices would go down further. That seems to be turning around. In The New York Times article, Mr. Yamamoto said, "Before, when you bought, you lost, now, when you don't buy, you lose." The deflationary response became a part of the Japanese consumers' thinking and could be difficult to overcome. Repeating what Mr. Sheard said, "Everyone in Japan has been living so long in the deflationary environment that this behavior is in the neurons of their brains."

2. Use any source available to explain what is meant by the statement in the article about the Chinese government intervening in the exchange market.

As the yuan rises against the dollar it takes more yuan to buy a dollar. Economists refer to this as depreciation. When a country’s currency depreciates, it takes more units of that nation’s currency (yuan) to buy a single unit of some foreign currency (dollar). As a result Chinese exports to the U.S. would become more expensive and U.S. exports to China would become less expensive.

3. Using any source available, compare the savings rate in Japan and the United States and discuss the consequences of having either too high or too low a rate?

Intervention in the exchange market is the act of a country’s government to keep exchange rates where they want them. A central bank can intervene in the market and buy or sell currency as needed. In our Chinese example, to prevent depreciation of the yuan the central bank would have to purchase any excess supply of yuan in the market with an equivalent amount of dollars. To prevent the yuan from appreciating the central bank would have to intervene when there was an excess supply of dollars by buying them with an equivalent amount of yuan.

Multiple Choice/True False Questions