Predict the expected spot exchange rate between the Japanese Yen and U.S.Dollar, given that inflation in Japan, at 8%, is 4% higher than in the U.S.and that the current spot rate is ¥107/$.
A)¥102.72/$
B)¥103.04/$
C)¥111.12/$
D)¥111.28/$

Question

Quizplus · Accepted Answer

According to the International Fisher Effect, the currency with the higher inflation rate is expected to depreciate. Since Japan's inflation is 4% higher than the U.S., the Yen is expected to depreciate by approximately 4%. Therefore, the expected spot rate is ¥107 * (1 + 0.04) = ¥111.28/$.

Predict the Expected Spot Exchange Rate Between the Japanese Yen