If the foreign currency equivalent of the domestic price of a commodity is less than the foreign price of the same commodity, then the derivation of PPP implies that:
A) the foreign currency is overvalued
B) the foreign currency is undervalued
C) the domestic currency is overvalued
D) none of the given answers

Question

Quizplus · Accepted Answer

The foreign currency is overvalued because the domestic price of the commodity is lower than the foreign price, but the foreign currency equivalent of the domestic price is also lower than the foreign price. This implies that the foreign currency is overvalued.

If the Foreign Currency Equivalent of the Domestic Price of a Commodity