Determine the value of the spot rate

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Reference no: EM1367773

Assume that on January 1, 1999 spot exchange rate was Yen/£=198. Over the year, British inflation rate was 4 percent, and the Japanese inflation rate was 6 percent.

i. What is the value of the spot rate (Yen/£) on December 31, 1999 implied by the relative PPP condition?

ii. If the spot rate was Yen/£= 206 on December 31, 1999, does the Japanese Yen appear to be overvalued or undervalued in PPP sense? Explain your answer.

Reference no: EM1367773

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