ArtTech exports a specialized machine part to Japan. The price set in Japan is ¥120,000 and the cost incurred in the US is $800. The current exchange rate is ¥120 per dollar. Over a year the inflation rate in US is 2% and the inflation rate in Japan is 1%. The price in Japan increases with the local inflation rate and the cost in the US increases by the US inflation rate. What will be the percentage change in the profit per unit one year later if the exchange rate did not change? [First compute the profit before and after the price/cost changes due to inflation.]

		-1%
		-2%
		-3%

If the market exchange rate remains constant while the PPP based exchange rate rises (for rates quoted as dollars per pound) the real exchange rate (dollars per pound) will:

		Increase
		Decrease