Suppose the price of a burger is $4.50 Canadian in Toronto, and the exchange rate is 103 U.S. cents per Canadian dollar. Then
A)the price of a burger is $4.50 U.S. in New York if purchasing power parity holds.
B)the price of a burger is $4.64 U.S. in New York if interest rate parity holds.
C)the price of a burger is $4.64 U.S. in New York if purchasing power parity holds.
D)the Canadian dollar is expected to appreciate according to purchasing power parity.
E)the Canadian dollar is expected to depreciate according to purchasing power parity.

Question

Quizplus · Accepted Answer

According to purchasing power parity, the price of a burger should be the same in both Toronto and New York after accounting for the exchange rate. Therefore, to find the price of a burger in U.S. dollars, we need to convert the Canadian price of $4.50 using the exchange rate of 103 U.S. cents per Canadian dollar:

$4.50 Canadian = $4.50 × (103/100) U.S. = $4.64 U.S.

Therefore, the price of a burger in New York, according to purchasing power parity, is $4.64 U.S.

Suppose the Price of a Burger Is $4