The Student Room Group

inflation/currency/PPP

Suppose Turkey’s inflation rate is 7% over one year and there is 1% deflation in Japan. According to relative PPP, what should happen over the year to E TL/YEN exchange rate? There will be

a- 7% depreciation of the Turkish Lira against the Yen.
b- 7% depreciation of the Turkish Lira against the Yen.
c- 8% appreciation of the Yen against the Turkish Lira
d- 6% appreciation of the Yen against the Turkish Lira
I read this and though I know the answer!! Then look at the multiple choose and became baffled.

At that boys and girls is why I hate multiple choose exams.
Reply 2
Original post by born_as_a_pro
Suppose Turkey’s inflation rate is 7% over one year and there is 1% deflation in Japan. According to relative PPP, what should happen over the year to E TL/YEN exchange rate? There will be

a- 7% depreciation of the Turkish Lira against the Yen.
b- 7% depreciation of the Turkish Lira against the Yen.
c- 8% appreciation of the Yen against the Turkish Lira
d- 6% appreciation of the Yen against the Turkish Lira


I go with D.

Assuming perfect PPP, and that inflation / deflation are bad for a currency. So against each other, the the T. lira should depreciate by 7% and the Yen depreciate by 1%.

So the net gain (appreciation ) of the Yen over the Lira is 6%
Reply 3
I would say C.

While Zenomorph is right that execisive inflation and any deflation is bad for a countries economy it does not seem translate into 6%.

The Turkish Lira experiences inflation of 7% which makes each lira worth less but the Yen experiences 1% deflation which makes each yen worth more, therefore 7 - (-1) = 8

Quick Reply