Suppose the exchange rate between the U.S.dollar and the Japanese yen is initially 90 yen per dollar.According to purchasing power parity,if the price of traded goods falls by 5 percent in the United States and rises by 5 percent in Japan,the exchange rate will become:
A) 72 yen per dollar
B) 81 yen per dollar
C) 99 yen per dollar
D) 108 yen per dollar

Question

Quizplus · Accepted Answer

According to purchasing power parity, if the price of traded goods falls by 5% in the United States, the US dollar will appreciate by the same amount. Conversely, if the price of traded goods rises by 5% in Japan, the Japanese yen will depreciate by the same amount. Therefore, the new exchange rate would be 90 * (1+0.05)/(1-0.05) = 81 yen per dollar.

Suppose the Exchange Rate Between the U