If a Starbucks tall latte cost $3.20 in the United States and 3 euros in the Euro area, then purchasing-power parity implies the nominal exchange rate is how many euros per dollar?
A) .938 If the exchange rate is less than this, it costs more dollars to buy a tall latte in the U.S. than in the Euro area.
B) .938 If the exchange rate is less than this, it costs fewer dollars to buy a tall latte in the U.S. then in the Euro area.
C) 1.067 If the exchange rate is less than this, it costs more dollars to buy a tall latte in the U.S. than in the Euro area.
D) 1.067 If the exchange rate is less than this, it costs fewer dollars to buy a tall latte in the U.S. than in the Euro area.

Question

Quizplus · Accepted Answer

Purchasing-power parity implies that the exchange rate should be such that the cost of a good is the same in both countries. In this case, the cost of a tall latte is $3.20 in the US and 3 euros in the Euro area. Therefore, the exchange rate should be 3 euros / $3.20 = 0.938 euros per dollar. If the exchange rate is less than this, it will cost more dollars to buy a tall latte in the US than in the Euro area.

If a Starbucks Tall Latte Cost $3