Question

In 2018, inflation rate was 1.9% in the U.S. and 0.3% in Japan. If the weak form of the PPP holds, during 2018 U.S. dollar should have

A. a nominal appreciation against yen by 1.6%

B. a nominal depreciation against yen by 1.6%

C. no change in nominal value against yen.

D. none of the above

Answer 1

B. a nominal depreciation against yen by 1.6%.

Inflation in US was 1.9% and inflation in Japan was 0.3%.

It means that the aggregate price level in US increased by 1.9% whereas the aggregate price level in Japan raised by 0.3%.

According to weak PPP theory, the nominal value of US dollar changed against Yen by the difference in inflation rate between US and Japan that is (0.3-1.9)% = -1.6%.

So, the value of US dollar against Yen had decreased by 1.6%.

Fall in value of a currency against another currency is called depreciation.

So, this is a nominal depreciation of US dollar against yen by 1.6%.

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