A basket of goods cost $800 in the U.S.The same basket of goods costs $1,000 in France and the exchange rate is .80 euros per dollar.The same basket of goods costs 960 Australian dollars and the exchange rate is 1.2 Australian dollars per U.S.dollar.Purchasing power parity with the U.S.holds in
A)both France and Australia
B)France but not Australia
C)Australia but not France
D)neither France nor Australia

Question

Quizplus · Accepted Answer

To check if purchasing power parity holds, we need to compare the cost of the same basket of goods in different countries, adjusted for exchange rates.

For France: 
The cost of the basket of goods in France is $1,000. To convert this to dollars, we multiply by the exchange rate: 
$1,000 x 0.80 euros/dollar = $800 
So the cost in France, adjusted for exchange rates, is the same as in the U.S. Therefore, purchasing power parity holds in France.

For Australia: 
The cost of the basket of goods in Australia is 960 Australian dollars. To convert this to dollars, we divide by the exchange rate: 
960 Australian dollars / 1.2 dollars/Australian dollar = $800 
So the cost in Australia, adjusted for exchange rates, is the same as in the U.S. Therefore, purchasing power parity also holds in Australia.

Since purchasing power parity holds in both France and Australia, the answer is (A) both France and Australia.

A Basket of Goods Cost $800 in the U