Let's analyze the situation step-by-step:
1. Initial Exchange Rate:
Initially, one U.S. dollar trades for 110 yen.
2. Appreciation of the U.S. Dollar Relative to the Yen:
If the U.S. dollar appreciates relative to the yen, this implies that now one U.S. dollar can purchase more yen than it could before. In other words, the value of the U.S. dollar has increased in comparison to the value of the yen.
3. Effect on Prices of Japanese Automobiles for Holders of U.S. Dollars:
When the value of the U.S. dollar increases relative to the yen, it effectively means that holders of U.S. dollars can now buy more yen for the same dollar amount. Consequently, any goods priced in yen, including Japanese automobiles, would cost fewer U.S. dollars than before because the purchasing power of the U.S. dollar has gone up in yen terms.
So, let us consider a Japanese automobile that has a price tag of 22,000 yen.
- Before the Appreciation:
At the initial exchange rate, the cost of the automobile in U.S. dollars would have been:
22,000 yen / 110 yen per U.S. dollar = 200 U.S. dollars.
- After the Appreciation:
If the U.S. dollar has appreciated, and for simplicity let's assume it now trades for 120 yen per U.S. dollar, the cost of the same automobile in U.S. dollars would now be:
22,000 yen / 120 yen per U.S. dollar = ~183.33 U.S. dollars.
You can see that due to the appreciation of the U.S. dollar relative to the yen, the same automobile now costs fewer U.S. dollars.
Thus, the correct explanation is: Since one U.S. dollar is worth more yen, Japanese automobiles are relatively less expensive to holders of U.S. dollars.
