If a basket of goods costs $100 in the United States and €120 in Europe,purchasing power parity theory predicts that the dollar/euro exchange rate should be _____.

Question

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The purchasing power parity theory states that the exchange rate between two currencies should be equal to the ratio of the prices of a basket of goods in the two countries. In this case, the basket of goods costs $100 in the United States and €120 in Europe, so the exchange rate should be $1 = €1.20.

If a Basket of Goods Costs $100 in the United