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- Subject
- Exchange-Rate Determinationeconomics-mcqs › exchange-rate-determination
- Published
- 1 Jun 2019
- Last updated
- 28 May 2026
If the United States experiences an 8% inflation rate while Japan has zero inflation, what does the purchasing power parity theory predict will happen to the value of the US dollar relative to the Japanese yen in the long term?
Multiple choice question for Exchange-Rate Determination. Select an option, then review the explanation below.
Explanation
According to purchasing power parity theory, a country with higher inflation will see its currency depreciate relative to a country with lower inflation. Since the US has an 8% inflation rate and Japan has none, the US dollar is expected to lose about 8% of its value against the yen over time.
More Exchange-Rate Determination MCQs
Practice related questions from the same subject.
- 1.If a Big Mac costs $3 in the United States and 2 pesos in Mexico, what is the implied purchasing power parity (PPP) exchange rate between the peso and the US dollar?
- 2.If Japan, with its high savings rate, invests capital overseas, how is the Japanese yen likely to be affected, and what impact would this have on Japan's trade balance?
- 3.If interest rates are the same on similar assets in the U.S. and abroad, and investors expect the U.S. dollar to weaken relative to foreign currencies in the future, where are investment funds most likely to move?
- 4.If a country's money demand equals its money supply and its balance of payments is initially balanced, which of the following changes would cause the balance of payments to shift into a surplus?
- 5.Which market expectation would lead to the U.S. dollar strengthening against the Japanese yen?