Suppose the Japanese exchange rate is currently 105 yen per dollar. The inflation rate in Japan over
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Suppose the Japanese exchange rate is currently 105 yen per dollar. The inflation rate in Japan over the next three years will run, say, 2 percent per year, whereas the U.S. inflation rate will be 6 percent. Based on relative PPP, what will the exchange rate be in three years?
Because the U.S. inflation rate is higher, we expect that a dollar will become less valuable.
The exchange rate change will be 2 percent − 6 percent = − 4 percent per year. Over three years the exchange rate will fall to:
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Corporate Finance
ISBN: 9781265533199
13th International Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe
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