Question

A can of soda costs $1.75 in the United States and 42 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 84 pesos. The peso-dollar exchange rate is__________ now pesos per dollar.

Answer 1

a. 24 pesos / dollar.

b. 48 pesos / dollar.

Step-by-step explanation:

a. Peso dollar exchange rate = P peso / P dollar = 42 pesos / $1.75 = 24 pesos / dollar.

Now, considering the double prices.

b. Peso dollar exchange rate = P peso / P dollar = 84 pesos / $1.75 = 48 pesos / dollar.