If a basket of goods in the United States costs $1,000, and the same basket of goods in Japan costs ¥125,000, then for PPP to exist, $1 should trade for ____ Japanese yen.
A) 4
B) 50
C) 125
D) 125,000

Question

Quizplus · Accepted Answer

PPP (Purchasing Power Parity) states that the exchange rate between two currencies should adjust to the price levels of a basket of goods and services in both countries. To determine the exchange rate between US dollars and Japanese yen, we need to divide the price level of the basket of goods in the US by the price level of the same basket of goods in Japan.

$1,000 / ¥125,000 = $0.008 / ¥1

Therefore, $1 should trade for ¥125, which is option C.

If a Basket of Goods in the United States Costs