If a basket of goods costs $100 in the United States and €120 in Europe,PPP theory predicts that the dollar/euro exchange rate should be:

Question

Quizplus · Accepted Answer

By comparing the prices of identical products in different currencies,it would be possible to determine the "real" or PPP exchange rate that would exist if markets were efficient.In this case dollar/euro exchange rate should be $100/€120 or $.833 per euro.In other words,$1 = €1.20.

If a Basket of Goods Costs $100 in the United