Answer: the JPY/AUD (the amount of JPY per 1 AUD) exchange rate is expected to decrease by 2%.

According to ex ante purchasing power parity (PPP), the expected change in exchange rate equals the inflation differential between the two countries. **Analysis of each option:** **Option A: JPY/AUD** - Inflation differential = Australia (3%) - Japan (1%) = 2% - Higher inflation currency (AUD) should depreciate - For JPY/AUD (JPY per AUD), depreciation means the exchange rate decreases - **Expected change: -2% ✓** **Option B: USD/AUD** - Inflation differential = Australia (3%) - US (4%) = -1% - Higher inflation currency (USD) should depreciate - For USD/AUD (USD per AUD), depreciation means the exchange rate decreases - **Expected change: -1% ✗ (should be +1%)** **Option C: JPY/USD** - Inflation differential = US (4%) - Japan (1%) = 3% - Higher inflation currency (USD) should depreciate - For JPY/USD (JPY per USD), depreciation means the exchange rate increases - **Expected change: +3% ✗ (should be -3%)** Only Option A correctly applies the PPP theory.

Author: LeetQuiz Editorial Team