Question

Assumes that an item costs $100 in the U.S. and the exchange rate between the U.S. and Canada is: $1 = C$1.27. Which one of the following concepts supports the idea that the item that sells for $100 in the U.S. is currently selling in Canada for $127?

a. Uncovered interest rate parity.
b. Purchasing power parity
c. Interest rate parity
d. International fisher effect
e. Unbiased forward rates condition

Answer 1

b. Purchasing power parity

Step-by-step explanation:

The purchasing power parity theory is based on a world price for equivalent goods. This means that a good in the United States will cost the same as a good in Canada. Since the price of the good is $US 100 in the United States, then the same good should cost the equivalent of in Canadian dollars.