Suppose the same basket of goods costs $100 in the U.S.and 50 pounds in Britain.According to purchasing power parity,if the two countries' price levels do not change,what will be the exchange rate?
A) 2 dollars/pound
B) 4 dollars/pound
C) 5 dollars/pound
D) 0.50 dollars/pound
E) 50 dollars/pound

Question

Quizplus · Accepted Answer

According to purchasing power parity, the exchange rate between two countries should equalize the price of a basket of goods between the two countries. In this case, since the basket of goods costs $100 in the US and 50 pounds in Britain, the exchange rate should be such that $100 is equivalent to 50 pounds. Therefore, $1 should be equivalent to 0.5 pounds or 2 dollars should be equivalent to 1 pound. Hence, the answer is A) 2 dollars/pound.

Suppose the Same Basket of Goods Costs $100 in the U.S.and