Suppose the nominal exchange rate is 95 yen / dollar,the price of beef in Japan is ¥1200,and the price of beef in Canada is $14.Using the purchasing-power parity theory,approximately how much should you expect the exchange rate to change by?
A) -9 yen / dollar
B) -1.1 yen / dollar
C) 1.1 yen / dollar
D) 9 yen / dollar

Question

Quizplus · Accepted Answer

According to purchasing-power parity, the exchange rate should adjust so that identical goods cost the same in different countries. The implied exchange rate is 1200/14 = 85.71 yen/dollar. The current rate is 95 yen/dollar, so it should decrease by approximately 9 yen/dollar to reach parity.

Suppose the Nominal Exchange Rate Is 95 Yen / Dollar,the