The theory of purchasing power parity (PPP) states that in the long-run exchange

Question

The theory of purchasing power parity (PPP) states that in the long-run exchange rates between two countries adjusts so that the price of an identical good is the same when expressed in the same currency. A scanner sells for $65.45 in the United States. The exchange rate between the U.S. dollar and the Swiss franc (SFr) is $0.8145 per Swiss franc. Assuming that PPP holds true, how much does the same scanner cost in Switzerland? SFr 92.41 SFr 80.36 SFr 100.45 SFr 76.34 Suppose the price of the scanner in Switzerland was actually SFr 64.29. Assuming no transaction costs, transportation costs, or import restrictions, PPP predicts that the demand would in Switzerland.

Explanation / Answer

(1) SFr 80.36

PPP cost in Switzerland = $65.45 / $0.8145 per SFr = SFr 80.36

(2) If actual price was SFr 64.29, demand will INCREASE in Switzerland (Since the scanner is cheaper in Switzerland than in US).

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

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