Suppose the exchange rate between the U.S.dollar and the Japanese yen is initially 90 yen per dollar.According to purchasing-power parity,if the price of traded goods rises by 10 percent in the United States and remains constant in Japan,the exchange rate will become
A) 72 yen per dollar
B) 81 yen per dollar
C) 99 yen per dollar
D) 108 yen per dollar

Question

Quizplus · Accepted Answer

According to purchasing-power parity, if the price of traded goods rises by 10% in the United States, then the dollar should weaken against the yen by approximately the same amount. This means that the buying power of the dollar decreases relative to the yen.

To calculate the new exchange rate, we can assume that 1 dollar buys the same basket of goods before and after the increase in prices. Since the price level in the US increased by 10%, the dollar buys 10% less goods. Therefore, to keep the same purchasing power, the exchange rate must adjust to reflect this change.

Starting with 90 yen per dollar, if the dollar buys 10% less goods, the new exchange rate should be 90 yen per dollar * 0.9 = 81 yen per dollar. So the correct answer is B) 81 yen per dollar.

Suppose the Exchange Rate Between the U