While shopping in the Mexican market,you find that limes cost 12 pesos each.You remember that back home they cost 60 cents each.If the Purchasing Power Parity Theory holds,the rate of exchange is:

Question

Quizplus · Accepted Answer

According to the Purchasing Power Parity Theory, the exchange rate should equalize the price of goods in different countries. If limes cost 12 pesos in Mexico and 60 cents in the US, the exchange rate should be 12 pesos/0.60 dollars, which simplifies to 20 pesos per dollar.

While Shopping in the Mexican Market,you Find That Limes Cost