What impact would the change in the exchange rate have on U.S. exports to Japan?

Two countries Japan and the United States produce just one good: Milk. Suppose the price of milk i Show more Two countries Japan and the United States produce just one good: Milk. Suppose the price of milk in the United States is $6.04 per gallon and in Japan it is 700 yen per gallon. (2 page max; 25 pt) A) According to PPP theory what should the Yen/$ spot exchange rate be? Show your calculation. B) Suppose the interest rate on US government securities with one-year maturity is 5.38% and the interest rate on Japanese government securities with one-year maturity is 1.29%. Forecast the spot exchange rate one year from today. Explain the logic of your answer. C) Given your answers to parts A) and B) theoretically speaking if the interest rate in US is higher than that in Japan the US dollar should appreciate or depreciate? How about inflation? If the inflation rate in US is higher than that in Japan the US dollar should appreciate or depreciate? D) Given your answers to parts A) and B) What impact would the change in the exchange rate have on U.S. exports to Japan? E) If the nominal interest rates of US and Japan are the same then what should happen to the purchasing power of the US dollar? Show less

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