According to purchasing-power parity theory, if the same fast-food hamburger costs $4.00 in Canada and 20 Tunisian dinars, what should the exchange rate be?
A) 1/5 Tunisian dinars per dollar
B) 1 Tunisian dinar per dollar
C) 5 Tunisian dinars per dollar
D) 25 Tunisian dinars per dollar

Question

Quizplus · Accepted Answer

According to purchasing-power parity theory, the exchange rate should be such that the cost of the same good is the same in different countries. Therefore, if a fast-food hamburger costs $4.00 in Canada and 20 Tunisian dinars in Tunisia, the exchange rate should be such that $4.00 is equal to 20 Tunisian dinars. This means that 1 Tunisian dinar is equal to $0.20. To get the exchange rate in terms of Tunisian dinars per dollar, we take the reciprocal of 0.20, which is 5. Therefore, 5 Tunisian dinars per dollar is the correct exchange rate.

According to Purchasing-Power Parity Theory, If the Same Fast-Food Hamburger