Suppose that The United States and Japan only produce one good – Roller Skates. Further, assume that Japanese produced roller skates and American roller skates are identical in every way.
a) If the American price of roller skates is $40 and the Japanese price of roller skates is 4,300 Yen, what should the USDJPY exchange rate be?
b) Now, suppose that it costs $5/pair to ship roller skates from the US to Japan. Within what range could the nominal exchange rate fluctuate without creating an arbitrage opportunity in roller skates?