Suppose the exchange rate between the U.S. dollar and the Mexican peso was $1 = 5 pesos. A can of Pepsi sells for $2 in Boston and for 12 pesos in Mexico City.
A) Purchasing power parity prevails with these prices.
B) Purchasing power parity does not prevail with these prices.
C) The U.S. dollar would be expected to depreciate.
D) None of the above answers is correct.

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) does not hold because the price of a can of Pepsi in Mexico City (12 pesos) does not equal the price in Boston ($2) when converted at the current exchange rate ($1 = 5 pesos). The equivalent price in pesos for a $2 can of Pepsi would be 10 pesos (2 * 5), not 12 pesos.

Suppose the Exchange Rate Between the U