Based on the purchasing power parity theory should the Japan
Based on the purchasing power parity theory, should the Japanese Yen appreciate or depreciate? Please provide ample justification.
Based on the purchasing power parity theory, should the Japanese Yen appreciate or depreciate? Please provide ample justification.
Solution
According to purchasing power parity future rate = spot rate * (1+inflation in Japan)/(1+inflation in foreign coutry). Since the inflation is Japan is lesser than that in the foreign country the future rate will be lower.
This means that lesser number of Yen would be required to purchase per unit of foreign currency in the future.
