If the real exchange rate between the United States and Japan remains unchanged, and the inflation rate in the United States is 6 percent and the inflation rate in Japan is 3 percent, the:
A) dollar will appreciate by 3 percent against the yen.
B) yen will appreciate by 3 percent against the dollar.
C) yen will appreciate by 6 percent against the dollar.
D) yen will appreciate by 9 percent against the dollar.

Question

Quizplus · Accepted Answer

If the real exchange rate remains unchanged, then the nominal exchange rate must adjust to reflect the difference in inflation rates between the two countries. In this case, since the inflation rate in the United States is higher than in Japan, the value of the dollar will decrease relative to the yen. Therefore, the yen will appreciate by 3 percent against the dollar, as stated in choice B.

If the Real Exchange Rate Between the United States and Japan