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    International Monetary Economics PPP

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    Suppose that on January 1, 1999 the spot exchange rate was Yen/£=198. Over the
    year, the British inflation rate was 4%, and the Japanese inflation rate was 6%.

    i. What is the value of the spot rate (Yen/£) on December 31, 1999 implied by the
    relative PPP condition?

    ii. If the spot rate was Yen/£= 206 on December 31, 1999, does the Japanese Yen
    appear to be overvalued or undervalued in PPP sense? Explain your answer.

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    Solution Preview

    According to PPP
    Spot rate on 31 dec 1999 / Spot rate on Jan 1999 = (1+Inflation in Japan)/(1+inflation in UK)
    Spot rate on 31 dec 1999 =(1+6%)/(1+4%)*198 = ...

    Solution Summary

    International Monetary Economics PPP overview is included. The overvalued PPP sense is examined.