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Homework answers / question archive / Suppose that the spot exchange rate between the Japanese Yen (Y) and the U
Suppose that the spot exchange rate between the Japanese Yen (Y) and the U.S. dollar ($) was Y110/$1 in 1990. Between 1990 and 1995, the consumer price index rose 20% in Japan, and 30% in the U.S. Then what will be the sport exchange rate in 1995 predicted by the Purchasing Power Parity Hypothesis?
Answer:
r1 = ro[(1+πf)/ (1+πh)] = (Y110/$1)[(1+0.2)/(1+0.3)] =Y101.538/$1.
That is, $ depreciates, and Y appreciates during the period.
