If a Starbucks tall latte costs $3.20 in the United States and 3 euros in the Euro area,then purchasing-power parity implies the nominal exchange rate is how many euros per dollar?
A).938 If the exchange rate is less than this,it costs more dollars to buy a tall latte in the U.S.than in the Euro area.
B).938 If the exchange rate is less than this,it costs fewer dollars to buy a tall latte in the U.S.then in the Euro area.
C)1.067 If the exchange rate is less than this,it costs more dollars to buy a tall latte in the U.S.than in the Euro area.
D)1.067 If the exchange rate is less than this,it costs fewer dollars to buy a tall latte in the U.S.than in the Euro area.

Question

Quizplus · Accepted Answer

Purchasing-power parity implies that the exchange rate should be such that the cost of a tall latte is the same in both countries. In this case, the cost of a tall latte in the U.S. is $3.20, and the cost of a tall latte in the Euro area is 3 euros. Therefore, the exchange rate should be 3 euros/$3.20 = 0.938 euros per dollar. If the exchange rate is less than this, it will cost more dollars to buy a tall latte in the U.S. than in the Euro area.

If a Starbucks Tall Latte Costs $3