The exchange rate between the US dollar and the Euro is $1 = .9 Euro. If...
The exchange rate between the US dollar and the Euro is $1 = .9 Euro. If Italian shoes costs $100 in the U.S. and 92 Euros in Italy, does purchasing power parity hold in this case? If the exchange rate instead were $1 = .89 Euro, is the rate closer to that where parity holds or further away?
Homework Answers
According to Purchasing Power Parity
100$=92 Euro
=>1 $=0.92 Euro
Purchasing power parity does not hold
At $1=0.89 Euro, the rate is further away
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The exchange rate between the US dollar and the Euro is $1 = .9
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