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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?

Exchange-Rate Determination MCQs for PPSC, FPSC, NTS, and Pakistan government job tests. Select an option below, then read the explanation.

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Subject
Exchange-Rate Determinationeconomics-mcqs › exchange-rate-determination
Published
1 Jun 2019
Last updated
28 May 2026

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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. 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. 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. 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. 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. 5.Which market expectation would lead to the U.S. dollar strengthening against the Japanese yen?
  6. 6.In a floating exchange rate system, what effect would a decline in income in the United States have on the demand for imports and foreign currency?
  7. 7.Given that the annual interest rate on U.S. government bonds is 12% with an inflation rate of 8%, and in Japan the interest rate on government bonds is 10% with an inflation rate of 5%, which direction will investment capital most likely move, and what will be the impact on the U.S. dollar?
  8. 8.What happens to Japanese exports if Japan experiences a current account deficit while its currency exchange rates are determined by the market?
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