If a premium-grade blank videocassette sells for 14 euros in Germany and that identical videocassette sells for $6 in the United States,exchange rate implied by PPP theory is ________ dollars per euro.

Question

Quizplus · Accepted Answer

PPP theory states that the exchange rate between two currencies should be equal to the ratio of the price levels in the two countries. Therefore, we can set up the following equation:

Price of videocassette in Germany / Price of videocassette in the US = Exchange rate

Using the given prices, we get:

14 euros / $6 = Exchange rate

Simplifying:

2.3333 = Exchange rate

Therefore, the exchange rate implied by PPP theory is 2.3333 dollars per euro. Rounded to three decimals, this is equivalent to 0.429 dollars per euro. Therefore, the correct answer is B.

If a Premium-Grade Blank Videocassette Sells for 14 Euros in Germany