The Correct Answer and Explanation is:
Here are the answers based on the image you provided:
- How many dollars would you need to rent the apartment in France? You would need: $578 (Calculation: 425 euros × $1.36 = $578)
- What is one euro worth in PPP dollars? One euro is worth: $1.18 (Calculation: $500 ÷ 425 euros = $1.18 per euro)
- Does the exchange rate give an accurate picture of the purchasing power of the Euro in France? Answer: No
Explanation:
This question tests your understanding of purchasing power parity (PPP), which compares what different currencies can buy in their respective countries. It begins by showing that you need $500 to rent a basic apartment in the United States and 425 euros for a comparable one in France. Using the market exchange rate, one euro is equal to $1.36. When you convert 425 euros to dollars using this rate, you get $578.
However, when you calculate how many dollars provide the same purchasing power as 425 euros—meaning, enough to rent a similar apartment—you use the ratio $500 divided by 425 euros. That results in $1.18 per euro. This is the PPP value of the euro.
The difference between these two values shows how currency exchange rates do not always reflect actual purchasing power. While the market exchange rate values one euro at $1.36, its PPP value is only $1.18. This means the euro appears stronger than it actually is in terms of real-life affordability in France. In short, the exchange rate overstates the value of the euro when considering equivalent living expenses.
This type of analysis is important in economics when comparing cost of living, international wages, or the relative strength of currencies across different countries.
