Suppose that the price of a television set is $10 in the United States and 1,500 yen in Japan. If the current exchange rate is 100 yen to the dollar, then purchasing power parity would predict that in the long run:

Question

Quizplus · Accepted Answer

Purchasing power parity would predict that exchange rates will eventually adjust to equalize the price of the same goods in different countries. In this case, the price of the television set in Japan is much lower than in the U.S. According to purchasing power parity, the exchange rate should adjust so that the price in Japan increases and the price in the U.S. decreases, until they are the same. Therefore, choice C is the correct answer.

Suppose That the Price of a Television Set Is $10