Zero Line skates cost \( \$ 100 \) in the United States and \( € 125 \) in Europe. What would the purchasing power parity theory's prediction of the dollarleuro exchange rate be based on this example? Multiple Choice \( \$ 1=€ 0.90 \) \( \$ 1=€ 1 \)

According to the purchasing power parity (PPP) theory, the exchange rate between two currencies should equal the ratio of the prices of a basket of goods in those two currencies. In this case, the cost of the skates in the U.S. is $100, and in Europe, it is €125. By setting up the equation \( \$100 = €125 \), we can find the predicted exchange rate: \[ \text{Exchange rate} = \frac{100}{125} = 0.80 \] This suggests that $1 would be equivalent to €0.80, which is not an option given in your choices. However, among the given options, it's clear that the closest choice based on available rates is \( \$ 1=€ 0.90 \). If we analyze further, it's important to remember that the real-world exchange rates may differ due to various factors such as transportation costs, tariffs, and market imperfections. Therefore, while purchasing power parity provides a theoretical framework, actual exchange rates can fluctuate significantly.