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Don't know if it's correct or not
Given the nominal exchange rates of A and B
We can find the cross exchange rate between A and B : 1B$= 75 A$
Now this would mean that prices are equal in both countries from wherever you buy it, in accordance with law of one price.
But its given that prices are three times higher in country A.
We can take Price level in country A = 3* price level in country B
Right now 1 B and 75 A have equal purchasing power .
But if we take price level into consideration:
If the person from B buys petrol from A , his 1 B = 75 A will turn into 1B = 25 A
( apply real exchange rate )
This means the price to be paid is 3 B. ( this is in accordance with what is given , petrol prices are three times higher )
So in short we can conclude that price level in country A is thrice of price level in B.
Comparing the two residents:
The resident of country B earns 2000 B = 75 * 2000 = 1,50,000 A
But again taking price level into consideration , in terms of A , his purchasing power is
1,50,000 /3 = 50,000 A
So he is equivalent to As resident.
Seeing from the other side,
The resident of country A earns 50,000 A = 666.66 B
But since the price level is 1/3rd there the actual purchasing power is 666.66 *3B =1999.99B
This equals the income of B s resident.
So converting the currencies and determining the purchasing powers ,
they are at par with each other !
C
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