5. Purchasing power parity

The law of one price

The theory of purchasing power parity (PPP) states that in the long-run exchange rates between two countries adjusts so that the price of an identical good is the same when expressed in the same currency.

A television costs 889.35 in England. The spot rate is currently $1.9956 per pound.

Assuming that PPP holds true, what is the price of the television in the United States?

$1,952.27

$1,774.79

$445.66

$512.51

Suppose the price of the television in the United States was actually $1,952.27. Assuming no transaction costs, transportation costs, or import restrictions, what does PPP predict would happen to the demand for the television in the United States?

The demand for the television would decrease in the United States.

The demand for the television would increase in the United States.