If the price of a pair of shoes in the U.S.is $80,the price of the same pair of shoes in Germany is 120 euro,and the exchange rate is 1.5 euro/$,the euro:
A) is correctly valued according to PPP.
B) is overvalued relative to PPP.
C) is undervalued relative to PPP.
D) None of the above is correct.

Question

Quizplus · Accepted Answer

The price of the shoes in the U.S. is $80, and the price of the same shoes in Germany is 120 euros. The exchange rate is 1.5 euros/$. So, the price of the shoes in Germany in dollars is 120 euros * 1.5 euros/$ = $180. Since the price of the shoes in the U.S. is $80 and the price of the shoes in Germany is $180, the euro is overvalued relative to PPP.

If the Price of a Pair of Shoes in the U.S.is