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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 Summary

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

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 = ...

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