Assume that the export price of a Toyota Corolla from Osaka, Japan is ¥2,500,000. The spot exchange rate is ¥119.50/$. The forecast rate of inflation in the United States is 1.25% 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 be the exchange rate at the end of the year?
(c) Assuming 100% pass-through of exchange rate, what will be the dollar price of a Corolla at the end of the year?
(d) Assuming 65% pass-through, what will be the dollar price of a Corolla at the end of the year?
(e) Suppose at the end of the year, a Corolla cost $21,000 in the U.S. What was the pass-through rate?