Suppose a cup of coffee is €1.50 in Germany and £0.50 in the UK. If purchasing power parity holds, what is the nominal exchange rate between euros and pounds?
A) €0.33 per pound
B) €1.50 per pound
C) €0.75 per pound
D) €3 per pound

Question

Quizplus · Accepted Answer

Purchasing power parity implies that the price of the same good should be the same in different countries when expressed in a common currency. Here, €1.50 in Germany should equal £0.50 in the UK. Therefore, the nominal exchange rate is €1.50/£0.50 = €3 per pound.

Suppose a Cup of Coffee Is €1