Asked by Aashma Bista on Jul 17, 2024
Verified
If the same basket of goods costs $400 in the United States and £200 in Britain,then according to the purchasing power parity theory,the:
A) goods and services must cost half as much in Britain as in the U.S.
B) exchange rate should approach $2 per pound.
C) exchange rate should approach $0.50 per pound.
D) goods and services must cost twice as much in Britain as in the U.S.
E) reason for the difference in price is a difference in the cost of transportation in the two countries.
Purchasing Power Parity
A theory which states that exchange rates between currencies are in equilibrium when their purchasing power is the same in each of the two countries.
Exchange Rate
The price at which one country's currency can be exchanged for another country's currency.
Basket of Goods
A representative collection of products and services used to monitor price changes and inflation over time.
- Understand the concept of purchasing power parity and its implications for exchange rates.
Verified Answer
Learning Objectives
- Understand the concept of purchasing power parity and its implications for exchange rates.
Related questions
Assume That Brazil and Mexico Have Floating Exchange Rates ...
The Idea That Floating Exchange Rates Will Equate the Buying ...
According to the Purchasing Power Parity Theory of Exchange Rates ...
The Theory of Purchasing-Power Parity States That a Unit of ...
Purchasing Power Parity Can Best Be Defined As ...