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What should be the exchange rate

Problem:

From the base price level of 100 in 1974, German and U.S. price levels in 2001 stood at 200 and 370, respectively. If the 1974 $/DM exchange rate was $0.23/DM, what should the exchange rate be in 2001?

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 Germany and multiply this times $/DM of .23.

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Finance Basics: What should be the exchange rate

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