On www.yodobashi.com, you can buy a Canon EOS camera for 298,000 yen. The same camera costs $2,700 on www.calumetphoto.com. If the exchange rate is ________ yen per dollar, we can determine ________ for this camera.
A) 92; interest rate parity doesn't occur
B) 92; purchasing power parity occurs
C) 110; interest rate parity occurs
D) 110; purchasing power parity occurs

Question

Quizplus · Accepted Answer

Purchasing power parity occurs when the price of a good in one country is equal to the price of the same good in another country, when converted to a common currency. In this case, the price of the camera in Japan is 298,000 yen, and the price of the camera in the US is $2,700. If the exchange rate is 92 yen per dollar, then the price of the camera in Japan is 298,000 yen / 92 yen per dollar = $3,239. This is higher than the price of the camera in the US, so purchasing power parity does not occur.

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