Problem 3:

Assume that the export price of a Toyota Corolla from Osaka, Japan is 2,150,000. The exchange rate is 88.60/$. The forecast rate of inflation in the United States is 2.2% per year and is 0.0% per year in Japan. Use this data to answer the following questions on exchange rate pass through.

a. What was the export price for the Corolla at the beginning of the year expressed in U.S. dollars?

b. Assuming purchasing power parity holds, what should the exchange rate be at the end of the year?

c. Assuming 100% pass-through of exchange rate, what will the dollar price of a Corolla be at the end of the year?

d. Assuming 75% pass-through, what will the dollar price of a Corolla be at the end of the year?