Question: In Problem, if the United States had somehow managed no inflation since 1981, what should the exchange rate be in 2010, using the purchasing power theory?
Problem: From the base price level of 100 in 1981, Saudi Arabian and U.S. price levels in 2010 stood at 200 and 412, respectively. If the 1981 $/riyal exchange rate was $0.26/riyal, what should the exchange rate be in 2010? Suggestion: Using the purchasing power parity, adjust the exchange rate to compensate for inflation. That is, determine the relative rate of inflation between the United States and Saudi Arabia and multiply this times $/riyal of 0.26.