Explore BrainMass

# International Monetary Economics PPP

Not what you're looking for? Search our solutions OR ask your own Custom question.

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

Suppose that on January 1, 1999 the spot exchange rate was Yen/Â£=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/Â£) on December 31, 1999 implied by the
relative PPP condition?

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

https://brainmass.com/economics/exchange-rates/international-monetary-economics-40254

#### Solution Preview

A)
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.

\$2.49