If the price of a burger is $2.90 Canadian in Toronto and $3 U.S. in New York, and if purchasing power parity holds, then the exchange rate is
A)$1 U.S. per Canadian dollar.
B)$3 U.S. per Canadian dollar.
C)97 cents U.S. per Canadian dollar.
D)103 cents U.S. per Canadian dollar.
E)none of the above.

Question

Quizplus · Accepted Answer

The correct answer is D) 103 cents U.S. per Canadian dollar.Purchasing power parity (PPP) theory suggests that the exchange rate between two currencies should be equal to the ratio of the prices of an identical basket of goods in each country. In this case, the price of a burger is $2.90 Canadian in Toronto and $3 U.S. in New York. Therefore, the exchange rate should be $3 U.S. / $2.90 Canadian = 1.0345, or approximately 103 cents U.S. per Canadian dollar.

If the Price of a Burger Is $2