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Purchasing Power Parity A computer costs $460 in the United States. The same model costs 725...

Purchasing Power Parity A computer costs $460 in the United States. The same model costs 725 euros in France. If purchasing power parity holds, what is the spot exchange rate between the euro and the dollar? Do not round intermediate calculations. Round your answer to two decimal places.

Expert Solution

Solution:

As per the information given in the question we have:

Cost of computer in US Dollars= $ 460

Cost of computer in Euros = € 725

Since Purchasing power parity holds good, the spot exchange rate between the Euro and the US Dollar is

= Cost of Computer in US Dollars / Cost of Computer in Euros

= $ 460 / € 725

= $ 0.63448

Thus

$ / € = $ 0.63448

$ / € = $ 0.63 ( when rounded off to two decimal places )

Thus the spot exchange rate in terms of dollars per Euro is 1€ = $ 0.63, when the purchasing power parity holds good.

The Spot exchange rate in terms of Euros per dollar is calculated as follows :

€ / $ = 1 / ( $ / € ) = 1 / 0.63448

€ / $ = € 1.57609

€ / $ = € 1.58 ( when rounded off to two decimal places )

Thus the spot exchange rate in terms of Euros per dollar is 1 $ = € 1.58, when the purchasing power parity holds good.

Thus the spot exchange rate between the Euro and the dollar is

$ / € = $ 0.63

€ / $ = € 1.58

jeff jeffy answered 8 months ago

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