A golf club costs $100 in the U.S. The same club costs AU$129 in Australia. Assume that purchasing power parity holds. What is the exchange rate between the U.S. and Australian dollars?

Question

Quizplus · Accepted Answer

According to the principle of purchasing power parity, the prices of the same goods in different countries should be equal when expressed in the same currency. Therefore, if a golf club costs $100 in the U.S. and AU$129 in Australia, the exchange rate between the two currencies can be calculated as follows:

$100 = AU$129 / x

Where x is the exchange rate (i.e. how many U.S. dollars one Australian dollar can buy). Solving for x, we get:

x = AU$129 / $100 = AU$1.29 / $1

Therefore, $1 U.S. = AU$1.29. To find the inverse exchange rate (i.e. how many Australian dollars one U.S. dollar can buy), we can take the reciprocal:

1 / x = $1 / AU$1.29

Simplifying, we get:

AU$1 = $0.7752 U.S.

Therefore, the best choice is C.

A Golf Club Costs $100 in the U