Suppose that a Starbucks Cappuccino costs dollar 3 65 in the U S and 2 60 pounds

Question

Suppose that a Starbucks Cappuccino costs dollar 3 65 in the U S and 2 60 pounds in the U.K. The nominal exchange rate is 0.75 pounds per dollar. The real exchange rate 1.05 U.K. Cappuccinos per U.S. Cappuccino. If purchasing power parity held, then the nominal exchange rate would be lower. 0 97 U.K. Cappuccinos per U.S. Cappuccino. If purchasing power parity held, then the nominal exchange rate would be higher. 0.97 U.K. Cappuccinos per U.S. Cappuccino. If purchasing power parity held, then the nominal exchange rate would be lower. 1.05 U.K. Cappuccinos per U.S. Cappuccino. If purchasing power parity held, then the nominal exchange rate would be higher Moving to another question will save this response.

Explanation / Answer

Real exchannge rate =( Nominal exchange rate * Domestic price ) / foreign price

=( 0.75 * 3.65 ) / 2.60 = 1.05 UK Cappuccinos per US Cappuccinos

If purchasing power parity held, then 2.60 pounds in UK = $3.65 in US

Excange rate = 0.71 pounds per US dollar.

Thus, Option A.

  

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.