Suppose a McDonalds Big Mac costs $4.40 in the United States and 3.30 euros in the euro area and 5.72 Australian dollars in Australia.If exchange rates are .75 euros per dollar and 1.3 Australian dollars per dollar,where does purchasing-power parity hold?
A)both the euro area and Australia
B)the euro area but not Australia
C)Australia but not the euro area
D)neither the euro area nor Australia

Question

Quizplus · Accepted Answer

To compare prices, we need to convert all prices into one currency. Assuming that the US dollar is the common currency, we have:

- Big Mac price in the US = $4.40
- Big Mac price in the euro area = 3.30 euros/$0.75 per euro = $4.40
- Big Mac price in Australia = 5.72 AUD/$1.3 per AUD = $4.40

Therefore, purchasing-power parity holds in both the euro area and Australia, where the price of a Big Mac is equivalent to $4.40 in US dollars.

Suppose a McDonalds Big Mac Costs $4