On behalf of your firm,you make frequent trips to Tokyo.You notice that you always have to pay more dollars to get your hair cut than you pay in the U.S.This observation is
A)consistent with purchasing-power parity if prices in Japan are rising more rapidly than prices in the United States.
B)consistent with purchasing-power parity if prices in Japan are rising less rapidly than prices in the United States.
C)inconsistent with purchasing-power parity,but might be explained by limited opportunities for arbitrage in haircuts across international borders.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

Purchasing-power parity (PPP) is a theory that states that the exchange rate between two currencies should be equal to the ratio of the prices of a basket of goods and services in the two countries. If prices in Japan are rising more rapidly than prices in the United States, then the yen will depreciate against the dollar, making it more expensive for Americans to buy goods and services in Japan, including haircuts.

On Behalf of Your Firm,you Make Frequent Trips to Tokyo