If the absolute PPP suggest that the dollar to pound should be 1.88 and the actual exchange rate in London is 2.50 $/pound,then:
A) The British pound is overvalued.
B) The U.S. dollar is overvalued
C) The British pound is undervalued
D) Exchange rates and absolute PPP are unrelated.

Question

Quizplus · Accepted Answer

According to absolute PPP, the exchange rate should be 1.88 $/pound. However, the actual exchange rate in London is 2.50 $/pound. This indicates that the British pound is overvalued, meaning it is more expensive than it should be based on the PPP.

If the Absolute PPP Suggest That the Dollar to Pound