CMA Final · Strategic Financial Management · The International Financial Environment
A basket of goods costs ₹4,500 in India and US$50 in the USA. Under absolute purchasing power parity, the equilibrium exchange rate is ₹/US$:
Absolute PPP says the exchange rate equals the ratio of domestic to foreign price of the same basket. Dividing ₹4,500 by US$50 gives ₹90 per US dollar. Multiplying the prices, or inverting the ratio, would give wrong values.
- A80
- B90Correct
- C95
- D225
Explanation
Absolute PPP gives rate = domestic price / foreign price = 4,500 / 50 = ₹90 per US$. Check: 50 x 90 = 4,500. The figure 225 results from multiplying 4,500 by 50 instead of dividing.
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