Suppose purchasing power parity (PPP) depends only on hamburgers. The exchange rate is C$1.00 = US$0.80 and hamburger prices are C$2.00 in Canada and US$1.80 in the U.S. PPP suggests that the Canadian dollar is undervalued.

Question

Quizplus · Accepted Answer

According to PPP, the exchange rate should equalize the price of a basket of goods (in this case, hamburgers) between two countries. Here, C$2.00 converts to US$1.60 (C$2.00 * 0.80), which is less than the US price of US$1.80, indicating the Canadian dollar is undervalued relative to the PPP exchange rate.

Suppose Purchasing Power Parity (PPP) Depends Only on Hamburgers