Scenario: Purchasing Power Parity A car costs $30,000 in the United States and the exchange rate is $1 = £0.50. The same car costs £12,000 in Britain. To have purchasing power parity, the pound must:

Question

Quizplus · Accepted Answer

According to the scenario, the car costs $30,000 in the US and £12,000 in Britain. If the exchange rate is $1 = £0.50, then the cost of the car in pounds would be £15,000 ($30,000 x 0.50). However, the actual cost of the car in Britain is £12,000. This suggests that the pound is undervalued relative to the US dollar, and therefore it would need to appreciate to reach purchasing power parity with the US dollar.

Scenario: Purchasing Power Parity a Car Costs $30,000 in the United