Suppose that, due to rising interest rates in the United States, the Japanese increase their purchases of U.S. securities.

  1. (10 points) Illustrate in a carefully labeled supply and demand diagram how this would affect the foreign exchange market and the exchange rate expressed in terms of yen per dollar.

  2. (5 points) Is this an appreciation or depreciation of the dollar?

  3. (5 points) Would we say that the yen is now “stronger”? Or “weaker”?

  4. (10 points) If the rise in interest rates was due to a deliberate Fed policy, does this

    international connection make such policy more, or less, effective? Explain in a few sentences.