Question: Question 2 - Purchasing Power Parity (18 Marks) The cost of a bundle of goods is USD 108 in the United States and JPY 14,000

Question 2 - Purchasing Power Parity (18 Marks) The cost of

Question 2 - Purchasing Power Parity (18 Marks) The cost of a bundle of goods is USD 108 in the United States and JPY 14,000 in Japan. (a) According to the absolute purchasing power parity, what is the implied APPP exchange rate of JPY/USD? (3 marks) (b) If the actual exchange rate is JPY/USD 120.00, is the USD undervalued or overvalued? (2 marks) (c) What is the real exchange rate? (3 marks) Suppose that the inflation is 6% in the United States and 4% in Japan in the following year. (d) Use JPY as the home currency. How much should the JPY appreciate or depreciate to the USD over a year? (3 marks) Explain why JPY should move. (3 marks) (e) Do you expect relative PPP may hold when absolute PPP does not? (4 marks)

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