Suppose the price of a standard pair of sport shoes is €60 in Spain and $85 in Canada,and the current exchange rate is 0.75 euro for one dollar.What is the purchasing-power parity exchange rate of the dollar?
A) 0.40 euro / dollar
B) 0.53 euro / dollar
C) 0.71 euro / dollar
D) 1.53 euro / dollar

Question

Quizplus · Accepted Answer

Purchasing-power parity exchange rate (PPPER) is the exchange rate that ensures the same amount of goods across countries. 
Here, the price of sport shoes in Spain is €60 and in Canada is $85. 
So, as per PPPER, $85 should be equal to (or can purchase the same amount of goods as) €60.
Let's calculate the PPPER: 
€1= $0.75 (given exchange rate) 
Then, x $85= €60 
Or, $85= €60/$x 
Or, x= €60/$85 
Or, x=0.7058 (approx) 
Therefore, the PPPER of the dollar is 0.71 euro/dollar (approx). 
Hence, the best choice is C.

Suppose the Price of a Standard Pair of Sport Shoes