A market basket of goods costs $350 in the United States and 200 pounds in the United Kingdom. According to the purchasing power parity theory, the exchange rate should move towards:

Question

Quizplus · Accepted Answer

According to purchasing power parity, the exchange rate should equalize the price of the market basket in both countries. Therefore, $350 should equal 200 pounds, which means the exchange rate should be $350/200 = $1.75 per British pound.

A Market Basket of Goods Costs $350 in the United