The inflation rate in the U.S. is 4%, while the inflation rate in Japan is 1.5%. The current exchange rate for the Japanese yen (¥) is $0.0080. After supply and demand for the Japanese yen has adjusted according to purchasing power parity, the new exchange rate for the yen will be

Question

Quizplus · Accepted Answer

According to purchasing power parity, the exchange rate should adjust to reflect the difference in inflation rates between the two countries. This can be done using the formula:

New exchange rate = Old exchange rate x (1 + inflation rate of home country) / (1 + inflation rate of foreign country)

Plugging in the values, we get:

New exchange rate = $0.0080 x (1 + 0.04) / (1 + 0.015) = $0.0082

Therefore, the best choice is B: $0.0082.

The Inflation Rate in the U