If a Starbucks vanilla latte costs $5 in Seattle and 4 euros in Paris, what must the exchange rate be if purchasing power parity holds? Question 7 options: a) 20 euros per dollar b) 4 euros per dollar c) 0.80 euros per dollar d) 1.25 euros per dollar

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28-04-2018
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If a Starbucks vanilla latte costs $5 in Seattle and 4 euros in Paris, what must the exchange rate be if purchasing power parity holds? Question 7 options: a) 20 euros per dollar b) 4 euros per dollar c) 0.80 euros per dollar d) 1.25 euros per dollar

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jushmk jushmk · Answer 1 · 2018-05-12T10:38:43+02:00

Purchasing power parity is basically the value of money in terms of what can be bought irrespective of market or region.
In the current scenario, Starbucks are expected to cost the same whether in Paris or Seattle. What matters here is the exchange rates.
If Starbucks costs $5 in Seattle and 4 Euros in Paris, the exchange rate is,

Exchange rate = Cost in Seattle/ Cost in Paris = $5/4 Euros = $1.25 per Euro or 4 Euros/$5 = 0.8 Euros per dollar. This means that Euro has more value than the dollar.

The correct answer is c.