Predict the expected spot exchange rate between the Japanese Yen and U.S.Dollar, given that inflation in Japan, at 8%, is 4% higher than in the U.S.and that the current spot rate is *107/$.
A)(*102.72/$)
B)(*103.04/$)
C)(*111.12/$)
D)(*111.28/$)

Question

Quizplus · Accepted Answer

According to the International Fisher Effect, the expected change in the exchange rate is approximately equal to the difference in inflation rates. With Japan's inflation 4% higher, the Yen is expected to depreciate by about 4%. Therefore, the expected spot rate is 107 * (1 + 0.04) = 111.28/$.

Predict the Expected Spot Exchange Rate Between the Japanese Yen