Suppose the nominal exchange rate is 95 yen/dollar, the price of beef in Japan is ¥1200, and the price of beef in Canada is $12. Using the purchasing-power parity theory, approximately how much should you expect the exchange rate to change by?
A) -12.6 yen/dollar
B) -5 yen/dollar
C) 5 yen/dollar
D) 12.6 yen/dollar

Question

Quizplus · Accepted Answer

The purchasing-power parity theory states that the exchange rate between two currencies should be equal to the ratio of the prices of a basket of goods in the two countries. In this case, the price of beef in Japan is ¥1200 and the price of beef in Canada is $12. Therefore, the exchange rate should be ¥1200/$12 = ¥100/$. The current exchange rate is ¥95/$, so the exchange rate should appreciate by ¥100 - ¥95 = ¥5/$.

Suppose the Nominal Exchange Rate Is 95 Yen/dollar, the Price