The dollar-yen exchange spot rate in the foreign exchange market is $0.011 per y

Question

The dollar-yen exchange spot rate in the foreign exchange market is $0.011 per yen. The value of a representative basket of goods and services consumed in the United States is $1,000. The value of a representative basket of goods and services consumed in Japan is ¥100,000. (a) What is the real dollar-yen exchange rate? (b) Is the spot-rate of the dollar overvalued, undervalued or neither versus the yen? If, over or undervalued, please calculate the percentage of the misvaluation. (Hint: The answer stated as a percentage is a round number.)

Explanation / Answer

a) Real dollar -yen exchange rate (RER)= Foreign exchange rate x ( Nominal Value of Japan / nominal VAlues of US)

Real dollar -yen exchange rate = 0.011 x (100000/1000) = 1.1

b) The US dollar is under valued as the RER value is >1 thus the value of Yen is greater than US which means the value is more than 0.1 means the misvalyuation is 10%

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