Task: Suppose that on January 1, 1999 the spot exchange rate was Yen/£=198. Over the year, the British inflation rate was 4%, and the Japanese inflation rate was 6%.
1) What is the value of the spot rate (Yen/£) on December 31, 1999 implied by the relative PPP condition?
2) 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.