What is the purchasing power parity theory of exchange rates

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a) What is the "purchasing power parity" theory of exchange rates? If the price of a representative bundle of tradable goods is currently $5000 in the U.S. and 550000 yen in Japan, is the $ undervalued or overvalued when the exchange rate is 90 yen per $?

b) Why don't actual exchange rates move to purchasing power parity levels in the short run?

Reference no: EM13834861

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