Suppose a Lexus LS400 and a Mercedes C300 are considered to be of equivalent value. The Lexus sells for 6,000,000 Japanese yen in Tokyo and the Mercedes sells for 50,000 euros in Stuttgart. Using the purchasing power parity theory, explain the exchange rate between the yen and the euro.
What will be an ideal response?
Purchasing power parity theory holds that equivalent goods should have the same price once the exchange rate is calculated. In this example, the exchange rate between yen and euro must yield a yen price translated into euros that is exactly 50,000 euros. The exchange rate that makes 6,000,000 yen equal to 50,000 euros is 120 yen = 1 euro. Using this exchange rate, the price of a Mercedes in yen is 6,000,000 (50,000 × 120) and the price of a Lexus in euros is 50,000 euros (6,000,000/120). Purchasing power parity is used primarily as a predictor of long-run exchange rates and not as a means to predict day-to-day changes in exchange rates.
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a. silver in the IMF vaults. b. Federal Reserve notes in banks. c. gold in Fort Knox. d. everyone's willingness to accept it.
The incentive to work is an ingredient of the negative income tax because:
A. if families do work, they will be eliminated from the program. B. if families don't work, they will be eliminated from the program. C. the more income earned in the workplace, the higher the family's after-tax income. D. the more income earned in the workplace, the higher the payment from the government.
Several firms in an industry laid off their workers. Assuming all else equal, this will lead to a ________
A) higher rate of output in the industry B) higher rate of capacity utilization in the industry C) lower rate of capacity utilization in the industry D) higher real wage in the industry