Suppose that the real interest rate in Japan and the U.S. is 2.00%. Furthermore, assume that the nominal (1year) interest rate in Japan is 4.00% while the nominal interest rate over the same time period in the United States is 12.50%.

The international Fisher effect theory predicts that the expected inflation in the U.S. is 10.50% while the expected inflation in Japan is 2.00%.

From the perspective of the United States (expected U.S. inflation minus expected Japanese inflation), the expected inflation rate differential between the two countries is

1) _________. According to purchasing power parity (PPP), using the U.S. as the home country, the Japanese Yen should 2) _________ by the same percent as the differential in inflation rates.

Options for 2) Depreciate or Appreciate