Suppose an MP3 player sells for $75 in the United States and for 50 pounds in Britain. Which exchange rate is consistent with purchasing power parity?
A) £1.50 for US$1
B) £1 for US$1.50
C) £3 for US$1
D) £1 for US$0.67

Question

Quizplus · Accepted Answer

According to purchasing power parity theory, the exchange rate between two currencies should be such that a given basket of goods and services should cost the same in both countries. Therefore, if an MP3 player costs $75 in the US and 50 pounds in Britain, the exchange rate that would make the prices of MP3 players equal in both countries would be 1.5 dollars for 1 pound (or £1 for $1.50). So, answer B is the best choice.

Suppose an MP3 Player Sells for $75 in the United