Question

Assume the spot exchange rate is 106.90 Japanese yen per U.S. dollar. If the inflation rate...

Assume the spot exchange rate is 106.90 Japanese yen per U.S. dollar. If the inflation rate in the U.S. is expected to be 2% and the inflation rate in Japan is 1% for the next two years, then the:

exchange rate will increase.

exchange rate will double.

dollar will appreciate relative to the yen.

dollar will become more valuable.

Yen will strengthen against the dollar.
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Answer #1

The correct answer is Yen will strengthen against the dollar.

The Inflation is the general increased in the prices of good and services, when the inflation of the countriy increased it leads to increase in the prices which leads to lower purchasing power as you will get same amount of good for a higher price which will devaulate the currency as the exports wil also lower. thus, the inflation of Dollar is more than yen , dollar will devaulate in comparidon to yen.

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