The export price of a Japanese car is ¥5,000,000. The exchange rate is ¥125.00/$. Inflation is 3.0% per year in the U.S. and 1.0% in Japan, per year.
1. What is the price of the Japanese car at the beginning of the year in U.S. dollars?
2. Assuming PPP holds: What is the exchange rate at the end of one year?
3. Assuming 100% pass-through of exchange rate, what will the dollar price of the Japanese car be at the end of one year?
4. Assuming 60% pass-through, what will be the dollar price of the car at the end of one year?