Based on the theory of Relative PPP, estimate the one-year spot rate of yen per dollar and calculate how much the dollar is expected to appreciate or depreciate over one year.

A current spot rate: 124.50/$

Expected inflation rates:

2% per annum in Japan

4% per annum in the U.S.

(Hint: Put Yen at the top of your diagram and put Dollar at the bottom of your diagram.)

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