Question

. Suppose absolute purchasing power parity holds. The exchange rate between British pounds and US dollars is British pound 0.75 per dollar. If a stereo costs $5000 in the United States, how much should it cost in Britain?

Answer 1

The stereo would cost 3750 British pound in Britain at the prevailing exchange rate.

Explanation:

Given details-  

The exchange rate between the British pound and US Dollar- 0.75 British pounds for 1 USD

Cost of the stereo= 5000 USD

Proportionate cost of the stereo in the British pound-

Exchange rate conundrum can be understood in the following way easily-

It means that for every 1 USD, a person in Britain would shell out 0.75 British pounds. In other words, the British pound is dearer than USD.

Since the cost of the stereo is 5000 USD and 1 USD is 0.75 British pound

5000 USD would equal 5000* 0.75 British pound= 3750 British pound

cost of the stereo is 3750 British pound