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Chapter 8

Q. 8.ST.2

Use what you know about tests of PPP to answer this question. Using the information in the first question, explain why the U.S. importer of Japanese computer components should be concerned about its future payments.


Verified Solution

Purchasing power parity does not necessarily hold. In our example, Japanese inflation could rise (causing the importer to pay more yen), and yet the Japanese yen would not necessarily depreciate by an offsetting amount, or at all. Therefore, the dollar amount to be paid for Japanese supplies could increase over time.