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 United States 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 currency with the higher inflation rate is expected to depreciate. Since Japan's inflation is higher by 4%, the yen is expected to depreciate by approximately 4%, leading to a new spot rate of ¥111.12/$.

Predict the Expected Spot Exchange Rate Between the Japanese Yen