Question

If a Starbucks tall latte cost $3.20 in the United States and 3 euros in the Euro area, then purchasing-power parity implies the nominal exchange rate is how many euros per dollar?

a. .938 If the exchange rate is less than this, it costs more dollars to buy a tall latte in the U.S. than in the Euro area.
b. .938 If the exchange rate is less than this, it costs fewer dollars to buy a tall latte in the U.S. then in the Euro area.
c. 1.067 If the exchange rate is less than this, it costs more dollars to buy a tall latte in the U.S. than in the Euro area.
d. 1.067 If the exchange rate is less than this, it costs fewer dollars to buy a tall latte in the U.S. than in the Euro area.

Answer 1

a. .938 If the exchange rate is less than this, it costs more dollars to buy a tall latte in the U.S. than in the Euro area.

Step-by-step explanation:

We can see in the example that the Euro is cheaper than the dollar in purchasing-power parity. More specifically, the exchange rate is .938 euros per dollar.

This is why it is more expensive to buy a tall latte in the U.S. than in Europe. The Euro is cheaper.