Under the theory of purchasing power parity, an increase in the U.S. price level of 10% relative to the Japanese price level will result in

Question

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Purchasing power parity (PPP) theory suggests that exchange rates adjust to maintain equal purchasing power of currencies. If the U.S. price level increases by 10% relative to the Japanese price level, it means that the U.S. dollar can buy less in the U.S. compared to what the yen can buy in Japan. This leads to a depreciation of the dollar and an appreciation of the yen, making the correct answer a 10% appreciation of the yen.

Under the Theory of Purchasing Power Parity, an Increase in the U.S