Suppose that Japan is the home country. If the Japanese inflation rate is 5 perc
ID: 1189506 • Letter: S
Question
Suppose that Japan is the home country. If the Japanese inflation rate is 5 percent while the U.S. inflation rate is 10 percent, then Japanese yen will:
appreciate by 15 percent against the U.S. dollar.
depreciate by 15 percent against the U.S. dollar.
depreciate by 5 percent against the U.S. dollar.
appreciate by 5 percent against the U.S. dollar.
A)appreciate by 15 percent against the U.S. dollar.
B)depreciate by 15 percent against the U.S. dollar.
C)depreciate by 5 percent against the U.S. dollar.
D)appreciate by 5 percent against the U.S. dollar.
Explanation / Answer
The interest rate parity (IRP) theory states that between two countries,
Inflation rate differential = Exchange rate differential.
Japan's inflation - US Inflation = 5% - 10% = - 5%
Therefore, as per IRP, Yen will appreciate by 5% against the US Dollar.
Correct option (D)