Question

Suppose 60,000 pesos buys a basket of goods in Mexico. If, at the existing exchange rate, it costs less than 60,000 pesos to buy the same basket of goods in the U.S., then purchasing power parity implies that the:
A. dollar is overvalued.
B. peso is undervalued.
C. dollar should cost fewer pesos.
D.dollar should cost more pesos

Answer 1

Answer:

D.dollar should cost more pesos

Explanation:

According to purchasing power parity, if 60,000 pesos buy a basket of goods in Mexico and after buying 60,000 pesos worth of dollars, the resulting amount is more than enough to buy the same basket in the U.S., it means that the dollar should cost more pesos than it currently does since there should be no amount left over after buying the basket in order to comply to the purchasing power parity.