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Question 7: A bushel of corn costs USD 3.45 in the US and JPY 450 in Japan, the current JPY/USD exchange rate is: x./USD = 13

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Answer #1

According to Purchasing power parity theorum, price of a thing is same all over the world.

Thus JPY/USD = 450 / 3.45

= 130.43

Fair Rate = 130.43

Actual Rate = 135.12

Thus USD is over valued

% = [ [Actual rate - Fair Rate ] / Fair Rate ] * 100

= [ [ 135.12 - 130.43 ] / 130.43 ] * 100

= [ 4.69 / 130.43 ] * 100

= 0.0359 i.e 3.59%

Pls comment, if any further assistance is required.

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