Question

The nominal exchange rate is about 3 aruban florins per dollar. if a basket of goods in canada costs $40, how many florins must a basket of goods in aruba cost for purchasing-power parity to hold?

a. 20 florins
b. 40 florins
c. 80 florins
d. 120 florins

Answer 1

The basket of goods in Aruba must cost 120 florins for purchasing-power parity to hold, as we multiply the nominal exchange rate of 3 Aruban florins per US dollar by the $40 cost of the basket of goods in Canada.

Step-by-step explanation:

The student's question is about purchasing-power parity (PPP), which relates the nominal exchange rate to the cost of a standard basket of goods in different countries. To find out how many florins a basket of goods in Aruba must cost for purchasing-power parity to hold, we use the provided nominal exchange rate:

Nominal exchange rate = 3 Aruban florins per US dollar

Cost of basket of goods in Canada = $40

For purchasing-power parity to hold, the cost in Aruba in florins would need to be equivalent to the cost in Canada in US dollars when converted through the nominal exchange rate. Therefore:

Cost in Aruba = Nominal exchange rate x Cost in Canada

Cost in Aruba = 3 florins/dollar x 40 dollars = 120 florins

So, the correct answer is d. 120 florins.