A golf club costs $100 in the United States. The same club costs AU$129 in Australia. Assume that purchasing power parity holds. What is the exchange rate between the U.S. and Australian dollars?

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) states that the exchange rate between two currencies should be equal to the ratio of the prices of the same good in the two countries. In this case, the same golf club costs $100 in the United States and AU$129 in Australia. Therefore, the exchange rate should be AU$1 = $0.7752 U.S.

A Golf Club Costs $100 in the United States