Question

One year ago, the spot exchange rate between Japanese yen and Swiss franc was S_1^Y/SFR = ¥160/SFr/ Today, the spot rate is S_0 ^¥/Sfr = ¥155/SFr. Inflation during the year was p^¥ = 2 percent and p^SFr= 3 percent in Japan and Switzerland, respectively.

a.) What was the percentage change in the nominal value of the Swiss franc?

b.) One year ago, what nominal exchange rate would you have predicted for today based on the difference in inflation rates?

c.) What was the percentage change in the real exchange rate, x_0 ?¥/SFr?^, during the year?

d.) What was the percentage change in the relative purchasing power of the franc?

e.) What was the percentage change in the relative purchasing power of the yen?

Answer 1

A ) SFRJYP= 160 (1 Year ago)

SFRJPY=155 (Today)

As can be seen SFR has depreciated against JPY. The % Change in SFR is (155/160)-1= -3.125%

B ) Since the inflation rate in Switzerland is higher than Japan. The SFR would have depreciated by 3-2=1% against the Yen.

So nominal exchange rate today: 160*0.99= 158.40

C ) Real Exchange Rate 1 Year Ago:

S (1+Inflation Rate in Japan)/ (1 + Inflation Rate in Switzerland)

=160(1+0.02)/ (1+0.03)

= 158.446

Real Exchange Rate Today:

=155(1+0.02)/ (1+0.03)

= 153.495

Therefore, % change in SFR: (153.495/158.446)-1= -3.125%