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Japan is expected to have inflation of 2% for the coming year, while the Us is...

Japan is expected to have inflation of 2% for the coming year, while the Us is expected to have inflation of 3%. The spot exchange rate is 125yen/$. A Toyota made in Japan costs 4.75 million yen today. Purchasing Power Parity holds. Which of the following is true?
a. A car made in the US will cost $38,760 one year from today
b. If the exchange rate is 125yen/$ one year from today, Japanese cars will have lost competitiveness
c. A car made in Japan and sold in the US will cost $39,140 one year from today
d. If the exchange rate is 120 yen/$ one year from today, US cars will have lost competitiveness

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Answer #1
We would calculate the spot rate of Yen/$ one year from today
Spot rate one year from today = Spot rate today*(Inflation in Japan/Inflation in US)
Spot rate one year from today = 125*(1.02/1.03)
Spot rate one year from today 123.78641
The spot exchange rate one year from today would be 123.78641yen/$
Since the purchasing power parity holds, the cost of car one year from today in US would be
Cost of car in dollar terms today = (4750000/125)
Cost of car in dollar terms today 38000
Since inflation is 3% the cost of car one year from today would be (38000*1.03) $39,140
Therefore the correct statement is option c
The car made in Japan and sold in the US will cost $39,140 one year from today
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