If a basket of goods costs 2 dollars in the United States and 10 euros in France, the theory of purchasing power parity states that the nominal exchange rate should be 5 euros per dollar.

Question

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Purchasing power parity suggests that exchange rates should adjust so that identical goods cost the same in different countries. If a basket costs 2 dollars in the US and 10 euros in France, the exchange rate should be 10 euros/2 dollars = 5 euros per dollar.

If a Basket of Goods Costs 2 Dollars in the United