Suppose a Starbucks tall latte costs $4.00 in the United States and 2.50 euros in the Euro area.Also,suppose a McDonald's Big Mac costs $4.50 in the United States and 3.60 euros in the Euro area.If the nominal exchange rate is .80 euros per dollar,which goods have prices that are consistent with purchasing-power parity?
A)both the tall latte and the Big Mac
B)the tall latte but not the Big Mac
C)the Big Mac but not the tall latte
D)neither the Big Mac nor the tall latte

Question

Quizplus · Accepted Answer

The Big Mac price in euros (3.60) divided by the exchange rate (0.80) equals $4.50, which matches the U.S. price, indicating purchasing-power parity. The tall latte does not match this condition.

Suppose a Starbucks Tall Latte Costs $4