The inflation rate in the U.S. is 4%, while the inflation rate in Japan is 1.5%. The current exchange rate for the Japanese yen (¥) is $0.0080. After supply and demand for the Japanese yen has adjusted according to purchasing power parity, the new exchange rate for the yen will be

Question

Quizplus · Accepted Answer

According to purchasing power parity (PPP), the exchange rate should adjust to reflect the relative changes in inflation rates between two countries. In this case, because the U.S. has a higher inflation rate than Japan, its currency (USD) will depreciate relative to the yen (JPY). Using the formula:

New exchange rate = old exchange rate x (1 + inflation rate of base country) / (1 + inflation rate of quote country)

We can calculate the new exchange rate for yen:

New exchange rate = $0.0080 x (1 + 0.04) / (1 + 0.015) = $0.0082

Therefore, the correct answer is B.

The Inflation Rate in the U