Figure 27-3 shows the demand and supply for U.S. dollars in an example in which Japan and the United
States trade only with each other.
a. Describe and draw the reciprocal supply and demand schedules for Japanese yen. Explain why the supply of yen is equivalent to the demand for dollars. Also explain and draw the schedule that corresponds to the supply of dollars. Find the equilibrium price of yen in this new diagram and relate it to the equilibrium in Figure 27-3.
b. Assume that Americans develop a taste for Japanese goods. Show what would happen to the supply and demand for yen. Would the yen appreciate or depreciate relative to the dollar? Explain.