If the price of wheat is $4 per bushel in the United States and £2 per bushel in Great Britain, what should the exchange rate be according to the purchasing power parity theory?

Multiple choice question for Exchange-Rate Determination. Select an option, then review the explanation below.

Explanation

According to purchasing power parity, the exchange rate should equal the ratio of the prices of the same good in the two countries. Since wheat costs $4 per bushel in the US and £2 per bushel in Great Britain, the exchange rate should be $4 divided by £2, which equals $2 per pound.

Practice related questions from the same subject.

1.If a Big Mac costs $3 in the United States and 2 pesos in Mexico, what is the implied purchasing power parity (PPP) exchange rate between the peso and the US dollar?
2.If Japan, with its high savings rate, invests capital overseas, how is the Japanese yen likely to be affected, and what impact would this have on Japan's trade balance?
3.If interest rates are the same on similar assets in the U.S. and abroad, and investors expect the U.S. dollar to weaken relative to foreign currencies in the future, where are investment funds most likely to move?
4.If a country's money demand equals its money supply and its balance of payments is initially balanced, which of the following changes would cause the balance of payments to shift into a surplus?
5.Which market expectation would lead to the U.S. dollar strengthening against the Japanese yen?

If the price of wheat is $4 per bushel in the United States and £2 per bushel in Great Britain, what should the exchange rate be according to the purchasing power parity theory?

Explanation

More Exchange-Rate Determination MCQs