If the real exchange rate between Canada and Japan remains unchanged, and the inflation rate in Canada 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, the nominal exchange rate must adjust to offset the difference in inflation rates. Since Canada's inflation is 3% higher than Japan's, the yen will appreciate by 3% against the dollar.

If the Real Exchange Rate Between Canada and Japan Remains