Question

A bundle of goods in Japan costs ¥4,235,000 while the same goods and services cost $31,200 in the United States.

a.	If purchasing power parity holds, what is the current exchange rate of U.S. dollars for yen? (Round your answer to 4 decimal places. (e.g., 32.1616))

Current exchange rate

$  per yen

b.	If, over the next year, inflation is 8 percent in Japan and 7 percent in the United States, what will the goods cost next year?

	Cost of Goods
Japan	¥
United States	$

c.

Will the dollar depreciate or appreciate relative to the yen over this time period?

	Appreciate
	Depreciate

Answer 1

Req a.
Cost of Goods in Japan = Cost of same goods in US
4235000 Y   = 31200 US $
Yen = 31200/4235000   US $
Therefore exchange rate is:
$ 0.00737 per Yen
Req b:
Costt of goods sold in Japan = 4235000+8% = 4573800
Cost of goods in US = 31200+7% = 33384
Rq c:
4573800 Yen = 33384 US$
Exchange rate
$ 0.007299 per Yen
Now, lesser US $ is available per Yen.
Hence, appreciation of US $