If the Absolute PPP Suggest That the Yen to U

question 4

Multiple Choice

If the absolute PPP suggest that the yen to U.S.dollar is 84.50 and the actual exchange rate in New York is 85.50 Yen/$,then:

• A) The Japanese yen is overvalued.
• B) The U.S. dollar is overvalued
• C) The U.S. dollar is undervalued
• D) Exchange rates and absolute PPP are unrelated.

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Definitions:

Real GDP

The inflation-adjusted value of all goods and services produced within a country's borders in a year, reflecting the actual productivity of an economy.

Price Level

An index reflecting the overall current prices for a wide range of goods and services within the economy, averaged out.

Exchange-Rate Effect

Refers to the impact of changes in the exchange rate on a country's export and import prices, and subsequently on its trade balance.

Aggregate-Demand Curve

A graphical representation showing the relationship between the total quantity of goods and services demanded (aggregate demand) and the overall price level, all else being equal.