The nominal exchange rate is about 1.8 Aruban florin per dollar.If a basket of goods in the United States costs $40,how many florins must a basket of goods in Aruba cost for purchasing power parity to hold?
A)18 florin
B)36 florin
C)72 florin
D)90 florin

Question

Quizplus · Accepted Answer

To ensure purchasing power parity, the cost of a basket of goods in both countries should be equal when converted using the exchange rate. Therefore, we need to convert $40 into Aruban florins. 
$40 x 1.8 Aruban florin per dollar = 72 florin 
So a basket of goods in Aruba must cost 72 florin for purchasing power parity to hold. Therefore, the answer is C) 72 florin.

The Nominal Exchange Rate Is About 1