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

-Suppose a 10-mile taxi ride costs £6.50 in London and $10.00 in Los Angeles. If the exchange rate is £1 = $1.70 purchasing power parity holds.

Question

The figure given below depicts the foreign exchange market for British pounds traded for U.S. dollars.Figure 22.2
 
-Suppose a 10-mile taxi ride costs £6.50 in London and $10.00 in Los Angeles. If the exchange rate is £1 = $1.70 purchasing power parity holds.

Quizplus · Accepted Answer

Purchasing Power Parity (PPP) would hold if the cost of the taxi ride in London when converted to dollars at the given exchange rate equals the cost in Los Angeles. Here, £6.50 converted to dollars at £1 = $1.70 would be $11.05, not equal to the $10.00 cost in Los Angeles, thus PPP does not hold.

The Figure Given Below Depicts the Foreign Exchange Market for British