It is common to examine likely exchange rate movements by reference to purchasin

Question

It is common to examine likely exchange rate movements by reference to purchasing power parity. Early in June 2014, the exchange rate between the Australian dollar and the United States dollar was $A1 = $US 0.95. Now at that time, the price of a given bundle of goods and services in Australia was $A115 and in the United States that same bundle of goods and services was priced at $US125.

Explaining and using purchasing power parity, determine from these data if the Australian dollar is overvalued or undervalued against the United States dollar and by how much.

Explanation / Answer

Ans

Exchange rate is 1/0.95=1.05 Australian dollars per usa dollar

According to ppp theory, ER is 115/125=0.92

Since currently more Australian dollars need to be exchanged to get 1 usa dollar, the Australian dollar is undervalued 100% right answer Please please like answer

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