The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2

-Suppose purchasing power parity exists in the car stereo market in the United States and Australia. If a car stereo costs $230 in the United States and the exchange rate is $1 = $AUD1.67, the same car stereo may be purchased in Australia for approximately:
A)$AUD 138.
B)$AUD 230.
C)$AUD 2,300.
D)$AUD 384.
E)$AUD 108.

Question

The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2
 
-Suppose purchasing power parity exists in the car stereo market in the United States and Australia. If a car stereo costs $230 in the United States and the exchange rate is $1 = $AUD1.67, the same car stereo may be purchased in Australia for approximately:
A)$AUD 138. 
B)$AUD 230. 
C)$AUD 2,300. 
D)$AUD 384. 
E)$AUD 108.

Quizplus · Accepted Answer

Using the purchasing power parity concept in the car stereo market, the price of a car stereo in the United States should equal the price of a car stereo in Australia, adjusted for the exchange rate. Therefore, $230 in the United States should be equal to $AUD 384 in Australia ($230 x 1.67). So, the answer is D, $AUD 384.

The Figure Given Below Depicts the Foreign Exchange Market for British