The nominal exchange rate is about 2 Aruban florin per dollar. If a basket of goods in Canada costs $40, how many florins must a basket of goods in Aruba cost for purchasing-power parity to hold?
A)20 florins
B)40 florins
C)80 florins
D)100 florins

Question

Quizplus · Accepted Answer

To maintain purchasing power parity, the exchange rate should reflect the relative prices of identical baskets of goods in two countries. Therefore, if a basket of goods in Canada costs $40 and the exchange rate is 2 Aruban florins per dollar, a basket of goods in Aruba should cost 80 florins ($40 x 2) to maintain purchasing power parity. Therefore, the correct answer is (C), 80 florins.

The Nominal Exchange Rate Is About 2 Aruban Florin Per