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International Monetary Economics PPP

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.

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.