Chapter 6, Problem 26QA

In Japan, Honda’s export price per vehicle was  5 million yen when the exchange rate was 125 yen per US dollar ($). The expected inflation rate in the Japanese yen for next year is 1%. The standard inflation rate in the US is 3%. Honda is actively trying to limit the passing exchange rate changes in prices to 60% of annual changes (i.e., if, for example, the US dollar depreciates by 10% against the yen, Honda will consider depreciation of the US dollar by only 6% (=0.60*10%) to calculate the new prices of its vehicles in US dollars). What was the price in $ of a Honda at the beginning of the year? Considering purchasing power parity, what would be the expected exchange rate between the yen and the US dollar at the end of the year Assuming Honda wants to pass 60% of exchange rate changes to the vehicle price, what would be the price of a Honda vehicle at the end of next year in US dollars ($)?

The statement “the yen rose today against the dollar from 121 to 117” will only make sense if     The U.S. gains when Japan loses.     These numbers measure yen per dollar, not dollars per yen.     These numbers are indexes, defined relative to a base of 100.     These numbers refer to time of day that the change took place.     The yen is a reserve currency.