Assume that U.S. annual inflation equals 8%, while Japanese annual inflation equals 5%. If purchasing power parity is used to forecast the future spot rate, the forecast would reflect an expectation of:
A) appreciation of yen's value over the next year.
B) depreciation of yen's value over the next year.
C) no change in yen's value over the next year.
D) information about interest rates is needed to answer this question.

Question

Quizplus · Accepted Answer

According to purchasing power parity, the currency of the country with the lower inflation rate (Japan) is expected to appreciate relative to the currency of the country with the higher inflation rate (U.S.).

Assume That U