QUESTION 5 A UAE importer of computers from Japan pays for the computers in Japanese Yen. The importer is not worried about a possible decrease in Japanese prices. This means that: A) This will be likely affect PPP. PPP never holds in international markets. Hence, the UAE imported would better to enter to an arbitrage transaction B) If Japanese prices fall because of lower inflation in Japan, then the value of the Yen should appreciate. Thus, even though the importer might need to pay fewer Yen, it would realize a loss from a strong Yen value (it would pay more dirhams for a given amount in Yen). If PPP holds, then the exchange rate AED/Yen should adjust to offset the differential inflation between UAE and Japan. C) If Japanese prices rise because of inflation in Japan, then the value of the Yen should decline. Thus, even though the importer might need to pay more Yen, it would benefit from a weaker Yen value. It would pay fewer dirhams for a given amount in Yen. Thus, there could be an offsetting effect if PPP holds. D) It would be preferable for the UAE importer to stop buying computers from Japan even if PPP holds, because of a strong Yen. In this case it would be better searching another exporter.