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Assume that the price of Big Mac in Japan is Yen750 while that in the United...

Assume that the price of Big Mac in Japan is Yen750 while that in the United States is $5.50. If the Yen-Dollar exchange rate is 125Yen/Dollar, what is the valuation of Japanese Yen?

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Answer #1

The price of Big Mac in Japan is Yen750

the price in the United States is $5.50.

If the Yen-Dollar exchange rate is 125Yen/Dollar

It means

$1=125 Yen

The price of Big Max in Dollar term is =$5.50

The price of Big Max in Yen terms= 5.50*125

=687.5 Yen

According to the exchange rate the price of Big Max is 687.50 Yen but actual price of this is 750 Yen in japan.

It means price is Japan is more compare to the US.

Hence demand of Japan Yen will decrease and Yen will depreciate in comparison of US dollar.

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