The purchasing power parity theory "predicts" that if the price of semiconductors in the United States is $3 and the price in Japan is 210 yen for a comparable semiconductor,the exchange rate would be (assume only 1 good is traded,there is no government intervention,and transportation costs are negligible)

Question

Quizplus · Accepted Answer

According to purchasing power parity theory, the exchange rate between two countries should be such that the same good (in this case, a semiconductor) should have the same price in both countries.

So, in this case, to determine the exchange rate, we can set up the following equation:

Price in US Dollars = Price in Japanese Yen x Exchange Rate

Plugging in the given values, we get:

$3 = 210 yen x Exchange Rate

Exchange Rate = $3/210 yen

Exchange Rate = 0.01428 yen/$

To get the yen/$ exchange rate, we need to take the reciprocal of this rate:

yen/$ exchange rate = 1/0.01428 = 70 yen/$

Therefore, the correct answer is C) 70 yen/$.

The Purchasing Power Parity Theory "Predicts" That If the Price