Suppose the same basket of goods costs $100 in the USA and £80 in Britain. According to PPP, if the prices do not change, what will be the exchange rate?
A) $5 per pound
B) $4 per pound
C) $1.25 per pound
D) $0.80 per pound

Question

Quizplus · Accepted Answer

According to PPP, the exchange rate would adjust so that the same basket of goods would cost the same in both countries. Since the basket of goods costs $100 in the US and £80 in Britain, we know that £80 must be worth $100 in order for the prices to be equal. Therefore, the exchange rate would be 1 pound = $100/£80 = $1.25 per pound.

Suppose the Same Basket of Goods Costs $100 in the USA