Suppose the exchange rate between the U.S.dollar and the Japanese yen is initially 90 yen per dollar.According to relative purchasing-power parity,if the price of traded goods rises by 10 percent in the United States and remains constant 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 relative purchasing-power parity, if the price of traded goods rises by 10% in the United States and remains constant in Japan, the exchange rate must adjust to offset the changes in relative price levels. The new exchange rate can be calculated as follows:
New exchange rate = Old exchange rate x (1 + US inflation rate) / (1 + Japanese inflation rate)
= 90 x (1 + 0.1) / (1 + 0)
= 81 yen per dollar. Therefore, the answer is B.

Suppose the Exchange Rate Between the U