If the exchange rate were 100 yen equals one dollar, but purchasing power parity indicates 90 yen for a dollar, then we would say the dollar is:
A) undervalued.
B) overvalued.
C) below parity.
D) inflationary.
E) below central bank parity.

Question

Quizplus · Accepted Answer

The dollar is overvalued because the current exchange rate (100 yen = 1 dollar) is higher than what purchasing power parity suggests (90 yen = 1 dollar). This means it takes more yen to buy a dollar than what the relative purchasing power of the two currencies would indicate.

If the Exchange Rate Were 100 Yen Equals One Dollar