Question

If the price level recently increased by 20​% in England while falling by 5​% in the United​ States, what must be the new exchange rate if PPP​ holds?

Assume that the current exchange rate is 0.54 pound per dollar.

Answer 1

The correct answer is 0.675 pounds per US dollars.

Step-by-step explanation:

The price level in England increased by 20% and fell by 5% in the US.

This implies that the US dollars appreciated by

= 5% + 20%

= 5%

This means that 25% more pounds will be required to purchase the same basket of goods in the US.

So, the exchange rate is

=
`1.25 * (0.54)/(1)`

= 0.675 pounds per US dollars