A desk costs $195 in the United States. The same desk costs 150 British pounds. If...
A desk costs $195 in the United States. The same desk costs 150 British pounds. If purchasing power parity holds perfectly, what is the exchange rate in dollars per pound?
Homework Answers
Ans) PPP states that exchange rate between countries are in equilibrium when their purchasing power is same i.e the exchange rate should be equal to the ratio of price level in two countries.
Purchasing power = cost of good in country A ÷ cost of good in country B
Purchasing power = $195 ÷ £150 = 1.3 dollar per pound.
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