Question

7. Problems and Applications Q7 A can of soda costs $1.50 in the United States and 24 pesos in Mexico. Assume purchasing-power parity holds. The peso-dollar exchange rate is ______ pesos per dollar. Suppose a monetary expansion causes all prices in Mexico to double, so that the price of soda in Mexico rises to 48 pesos. The peso-dollar exchange rate is now ________ pesos per dollar.

Answer 1

A can of soda costs $1.50 in the United States and 24 pesos in Mexico. Assume purchasing-power parity holds. The peso-dollar exchange rate is 16  pesos per dollar.

What is meant by the purchasing power?

• The worth of a currency is determined by how many goods or services one unit of that currency can be used to purchase.
• Inflation may cause it to deteriorate over time. This is due to the fact that you may acquire fewer items or services as a result of increased pricing.
• You can shop at the top federal employee payroll deduction website, Purchasing Power, which is accessible to federal employees, federal retirees, and military retirees. Using salary allowance, this online shopping experience is made to provide you with the items you require.

Purchasing Power Parity = Cost of good X in currency 1 / Cost of good X in U.S. dollar.

peso-dollar exchange rate = 24/1.5 = 16 pesos per dollar

expansion causes all prices in Mexico to doubl:

peso-dollar exchange rate = 48/1.5 = 32 pesos per dollar

A monetary expansion causes all prices in Mexico to double, so that the price of soda in Mexico rises to 48 pesos. The peso-dollar exchange rate is now 32 pesos per dollar.

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