Under Purchasing Power Parity A) E_$/P = P_US/P_E. B) E_$/E = P_US/P_E. C) E_$/E = P_US - P_E. D) E_$/E = P_E/P_ES. E) E_$/E = P_US + P_E.

Question

Quizplus · Accepted Answer

Purchasing Power Parity (PPP) is an economic theory that suggests the exchange rate between two countries should be equal to their relative price levels. Therefore, the equation for PPP is ES1U1B1$/ES1U1B0 = PS1U1B1USS1U1B0/PS1U1B1ES1U1B0, where ES1U1B1$ is the exchange rate of the US dollar to the foreign currency, PS1U1B1USS1U1B0 is the price level of a basket of goods in the foreign country converted to US dollars, and PS1U1B1ES1U1B0 is the price level of the same basket of goods in the foreign country in its local currency. Therefore, option B is the correct choice.