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(Solved): Suppose price of a representative basket in Turkey is 100 TL, and the price of the same basket in E ...
Suppose price of a representative basket in Turkey is 100 TL, and the price of the same basket in E.U. is 10 EURO. If purchasing power parity holds, a) b) What would be the TL-EURO exchange rate (1 TL= ? EURO)? If a monetary expansion caused all prices in Turkey to double, what would happen to the TL-EURO exchange rate?
Expert Answer
Ans a In economics, the purchasing power parity (PPP) theory states that the exchange rate between 2 currencies is in a state of equilibrium when their purchasing power is equal in the 2 countries. If a representative basket of goods costs 100 TL in