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5 June, 22:23

4. The inflation rate in the U. S. is 3%, while the inflation rate in Japan is 1.5%. The current exchange rate is $1 equal to 105 Japanese yen. If purchasing power parity condition is existed, what is the new exchange rate for the yen?

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  1. 5 June, 23:00
    0
    103.4709

    Explanation:

    The computation is shown below:

    Given that

    U. S inflation rate = 3%

    Japan inflation rate = 1.5%

    Current exchange rate = 105

    Now the new exchange rate for the yen is

    = Current exchange rate * (1 + Japan inflation rate) : (1 + U. S inflation rate)

    = 105 * (1 + 1.5%) : (1 + 3%)

    = 105 * (1.015 : 1.03)

    = 105 * 0.985436893

    = 103.4709
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