Finance Assignment | Professional Writing
May 20th, 2020
2. The U.S. rate of inflation is projected at 2% per year over the next ten years, while the Japanese rate of inflation is projected at 0% per year. The current exchange rate is 111 yen/$.
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a) If you do not think the dollar is currently overvalued or undervalued against the yen, what is the exchange rate ten years hence predicted by purchasing power parity? (Comment: remember that the country with the lower inflation rate has the appreciating currency; double-check your answer).
b) If you think the dollar is overvalued by 30% in real terms against the yen, what exchange rate would you predict 10 years hence? Assume that mis-valuations have an expected half-life of 5 years.
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