If a McDonald's Big Mac cost $4.50 in the United States and 3.60 euros in the Euro area,then purchasing-power parity implies the nominal exchange rate is how many euros per dollar?
A)1.25 If the value is less than this,it costs more dollars to buy a Big Mac in the U.S.than in the Euro area.
B)1.25 If the value is less than this,it costs fewer dollars to buy a Big Mac in the U.S.then in the Euro area.
C).80 If the value is less than this,it costs more dollars to buy a Big Mac in the U.S.than in the Euro area.
D).80 If the value is less than this,it costs fewer dollars to buy a Big Mac in the U.S.than in the Euro area.

Question

Quizplus · Accepted Answer

Purchasing-power parity suggests that the exchange rate should equalize the price of identical goods in different countries. Here, 3.60 euros per Big Mac divided by $4.50 per Big Mac gives an exchange rate of 0.80 euros per dollar.

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