The inflation rate in the U.S.is 3%,while the inflation rate in Japan is 1.3%.The current exchange rate for the Japanese yen (¥)is $0.0075.After supply and demand for the Japanese yen has adjusted in the manner suggested by purchasing power parity,the new exchange rate for the yen will be:

Question

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Purchasing power parity (PPP) suggests that the exchange rate between two currencies should adjust so that the price of a basket of goods is the same in both countries. In this case, the inflation rate in the U.S. is higher than the inflation rate in Japan, so the yen should depreciate against the dollar. The new exchange rate will be $0.0076, which is the current exchange rate multiplied by (1 + 3% - 1.3%).

The Inflation Rate in the U