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Consider the following table of exchange rates and prices (year-end) 2004 2005 2006 Yen per US dollar 103 117 119 Japan Price Index 100 101

Consider the following table of exchange rates and prices (year-end)

2004 2005 2006

Yen per US dollar 103 117 119

Japan Price Index 100 101 101

US Price Index 100 102 105

a. Calculate the real value of the Japanese yen in terms of dollars in 2004 through 2006. Did the real value of the yen in terms of dollars increase or decrease?

b. Based on what you show in a), did Purchasing Power Parity hold over the period 2004 to 2006? Why or why not? What does this say about the overall performance of PPP?

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