Reference no: EM132306313

In the 1980s, many Japanese export industries were oligopolistic—that is, they consisted of a few large firms able to set the prices for their own products. When the 1985 Plaza Accord initiated a large-scale appreciation of the yen against the dollar ("endaka"), these Japanese exporters sought to maintain their U.S. market share by preventing the exchange rate change from passing through to their U.S. customers. (a) Between 1985 and 1987, the yen appreciated by approximately 50 percent against the dollar. In what direction and by how much would Japanese exporters have had to adjust the yen prices of their products in order to prevent the appreciation from having an effect on the dollar prices paid by U.S. customers (0 percent pass-through)? (b) What are the implications for the shape of the domestic DD curve if all exporters (domestic as well as foreign) are able to adjust their prices so as to achieve 0 percent pass-through? (c) What are the implications for the shape of the DD curve if foreign exporters are able to fully prevent exchange rate pass-through but domestic exporters are not? [Hint: Compare to the case where pass-through by all exporters is 100 percent and to the case where it is 0 percent.]