If purchasing-power parity holds, and a tonne of rice costs $200 in Australia and 15 000 yen in Japan, then the nominal exchange rate is:
A)300 yen/$
B)30 $/yen
C)75 yen/$
D)750 yen/$

Question

Quizplus · Accepted Answer

According to purchasing-power parity (PPP), the price of a good in one country should be equal to the price of the same good in another country, after converting the prices into a common currency. Therefore, if a tonne of rice costs $200 in Australia and 15,000 yen in Japan, then we can use these prices to determine the nominal exchange rate between the two currencies.

First, we need to convert the price of rice in Australia into yen, using the current exchange rate. Let's assume the current exchange rate is 100 yen/$, so $200 would be equal to 20,000 yen.

Next, we can use PPP to determine the nominal exchange rate between the two currencies. If a tonne of rice costs 20,000 yen in Australia (after converting from $200), and the same tonne of rice costs 15,000 yen in Japan, then we can say that the exchange rate should be such that 20,000 yen = 15,000 yen, or 4/3 yen. To convert this to the yen/$ exchange rate, we take the reciprocal: 3/4 = 0.75 or 75 yen/$.

Therefore, the answer is C) 75 yen/$.

If Purchasing-Power Parity Holds, and a Tonne of Rice Costs