If Canadian inflation is 4% while Japanese inflation is 7%,purchasing power parity (PPP)theory predicts that the Japanese yen will ________ relative to the Canadian dollar.

Question

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According to the purchasing power parity (PPP) theory, if a country's inflation rate is higher than that of another country, its currency will depreciate against the other country's currency by the inflation rate differential. In this case, with Japanese inflation at 7% and Canadian inflation at 4%, the difference is 3%. Therefore, the Japanese yen is predicted to depreciate by 3% relative to the Canadian dollar.

If Canadian Inflation Is 4% While Japanese Inflation Is 7%,purchasing