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Suppose that annual inflation levels are currently at 4% in Japan and 6% in the United Kingdom. If the levels of inflation move during the next year to 3% in Japan and 8% in the United Kingdom, what effect are these changes in inflation likely to have on the relative value of the yen and the pound by the end of next year, according to the purchasing power parity theory of long term exchange rates? Sterling will decline in value against the yen by A. 3.0% B. 5.0% C. 2.8% D. 4.6% |