According to purchasing power parity,which of the following is FALSE about an overvalued dollar compared to the Japanese yen?
A)U)S.merchants would be motivated to import more Japanese goods.
B)Japanese merchants would tend to export more to the United States.
C)Prices in the United States would tend to fall.
D)Over the long term,the exchange rate would fall.
E)Prices in Japan would tend to rise.

Question

Quizplus · Accepted Answer

An overvalued dollar compared to the Japanese yen means that the dollar is worth more than the yen, making Japanese goods relatively cheaper for Americans. This would make US merchants more likely to import more Japanese goods, and Japanese merchants more likely to export more to the United States (A and B are true). Prices in the United States would tend to fall due to the increased supply of cheaper Japanese goods (C is also true). However, over the long term, the exchange rate would not necessarily fall since an overvalued currency can persist for extended periods, especially if it is caused by structural factors rather than speculative behavior. Therefore, D is false. Prices in Japan would tend to fall as its exports (including to the US) would become relatively expensive and less competitive (E is false).

According to Purchasing Power Parity,which of the Following Is FALSE