Based on PPP and the quantity theory of money, everything else remaining unchanged, if Japan's real income rises relative to real income in the U.S., there would be a(n):
A)appreciation of the dollar.
B)appreciation of the yen.
C)interest rate parity.
D)decrease in the demand for yen in the foreign exchange market.

Question

Quizplus · Accepted Answer

According to PPP, a rise in real income in Japan relative to the US will lead to an increase in the relative price level in Japan. As a result, the demand for yen will increase, leading to an appreciation of the yen. Additionally, according to the quantity theory of money, if real income in Japan rises, the demand for money in Japan will increase, leading to an increase in the quantity of money supplied. This will result in an appreciation of the yen.

Based on PPP and the Quantity Theory of Money, Everything