In the context of unchanged real exchange rates, if the inflation rate in the U.S. is 6% and in Japan is 3%, what will happen to the yen?

In the context of unchanged real exchange rates, the nominal exchange rates adjust in response to different inflation rates between countries. Here, the inflation rate in the U.S. is 6%, while in Japan, it is 3%.

In a scenario where the U.S. has a higher inflation rate than Japan, the purchasing power of the dollar decreases more rapidly than that of the yen. This means it takes more dollars to purchase the same amount of goods that were previously cheaper. To maintain the relative value of the currencies, the yen must appreciate against the dollar.

Specifically, the difference in inflation rates (6% - 3% = 3%) indicates that the yen will appreciate by 3% against the dollar. This adjustment keeps the purchasing power parity intact, thereby ensuring that the real exchange rate remains unchanged even with the differing inflation rates.

Therefore, the conclusion that the yen will appreciate by 3% against the dollar accurately reflects the consequences of the inflation differential between the two economies.