Question

The inflation rate in the U.S. is 2%, while the inflation rate in Japan is 10%....

The inflation rate in the U.S. is 2%, while the inflation rate in Japan is 10%. The current exchange rate for the Japanese yen (¥) is $0.0092. After supply and demand for the Japanese yen has adjusted in the manner suggested by purchasing power parity, the new exchange rate for the yen will be: (Points : 3.5)

       $0.0099.
       $0.0085.
       $0.0082.
       $0.0096.

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Answer #1

S1 / S0 = (1 + Iy) ÷ (1 + Ix)

Where,
S0 is the spot exchange rate at the beginning of the time period (measured as the "y" country price of one unit of currency x)
S1 is the spot exchange rate at the end of the time period.
Iy is the expected annualized inflation rate for country y, which is considered to be the foreign country.
Ix is the expected annualized inflation rate for country x, which is considered to be the domestic country.

=(1.02/1.10)*$.0092=$.0085

Option B

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