Q3. Consider purchasing power parity (PPP) holding across long-run exchange rates. Sup- pose an identical basket of goods is available in the US and Japan. In the US the goods are valued at 1,400 USD whereas in Japan they are valued at 194,775 Japanese Yen (JPY). 1) What is the implicit USD-JPY exchange rate, if the PPP relationship is satisfied under this scenario? 2) Suppose that the exchange rate, USD-JPY, is currently 112 JPY per USD. Is the USD undervalued or overvalued? Explain why. 8.0 8 3) Given the disparity between goods prices for the same basket from the US and Japan, would this classify as an arbitrage opportunity? 4) How would a Japanese merchant go about exploiting price differences between the US and Japan for the same basket of identical goods? gears 5) What effect would these actions have on the USD-JPY exchange rate? At what stage of the exchange rate would these price pressures cease