Suppose that the rate of inflation in Japan is 1 percent and the rate of inflation in the United States is 3 percent. If the real exchange rate remains constant, the value of the U.S. dollar relative to the yen must:

Question

Quizplus · Accepted Answer

If the real exchange rate remains constant and the inflation rate in the United States is higher than in Japan, the value of the U.S. dollar relative to the yen must decrease to compensate for the higher inflation. The difference in inflation rates is 2 percent (3% - 1%), indicating the U.S. dollar must fall by approximately 2 percent relative to the yen.

Suppose That the Rate of Inflation in Japan Is 1