Question

Suppose that the real exchange rate between the dollar and the yen is 1.5 (japanese goods per u.s. good). purchasing power parity predicts which of the following?

Multiple Choice (Select all that apply)?
A. The U.S. dollar will depreciate.
B. The U.S. dollar will appreciate.
C. The U.S. price level will rise.
D. The U.S. price level will fall.
E. The Japanese price level will rise.
F. The Japanese price level will fall

Answer 1

Purchasing power parity predicts that the U.S. dollar will appreciate, the U.S. price level will rise, and the Japanese price level will fall. The correct answer is option B., C. and F.

Step-by-step explanation:

Purchasing power parity (PPP) predicts that when the real exchange rate between the dollar and the yen is 1.5 (japanese goods per u.s. good):

• The U.S. dollar will appreciate because 1 U.S. good will be able to buy more Japanese goods.
• The U.S. price level will rise because the appreciation of the U.S. dollar will increase the price of Japanese goods in terms of dollars.
• The Japanese price level will fall because the appreciation of the U.S. dollar will decrease the price of American goods in terms of yen.