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Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

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BuyFindarrow_forward

Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

If a cup of coffee costs 2 euros in Paris and $6 in New York and purchasing-power parity holds, what is the exchange rate?

a. 1/4 euro per dollar

b. 1/3 euro per dollar

c. 3 euros per dollar

d. 4 euros per dollar

To determine

Exchange rate between Paris and New York.

Explanation

Option (b):

If the purchasing power parity holds, the exchange rate between Paris and New York when a cup of coffee costs 2 Euros in Paris and $6 in New York is calculated as follows:

Exchange rate=Unit cost for cup of coffeeParisUnit cost for cup of coffeeNew york=26=13

The exchange rate between Paris and New York is 13

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