Question

If the real exchange rate between the United States and Japan remains unchanged, and the inflation rate in the United States is 6 percent and the inflation rate in Japan is 3 percent, the _________.

A) dollar will appreciate by 3 percent against the yen.
B) yen will appreciate by 3 percent against the dollar.
C) yen will appreciate by 6 percent against the dollar.
D) yen will appreciate by 9 percent against the dollar.

Answer 1

Answer: B) yen will appreciate by 3 percent against the dollar.

Step-by-step explanation:

Let's look at this logically. The exchange rate between the Dollar and the Yen have not changed yet inflation in both countries is different. In the US prices have gone up by 6% whereas in Japan prices have gone up by only 3%.

This means that in Japan, prices are 3% cheaper than they are in the US yet the Real Exchange Rate did not change.

This means that the Japanese Yen will therefore increase in value against the US dollar because the US Dollar is able to buy goods at a price 3% more than the Japanese Yen can meaning it's value must have dropped in relation to the Yen that can buy at prices 3% less signifying that it is stronger by 3%.