If purchasing power parity holds and the nominal exchange rate is 1.5 U.S. dollars for one Canadian dollar, then a Big Mac that costs two Canadian dollars in Canada will cost _____ U.S. dollar(s) in the United States.

Question

Quizplus · Accepted Answer

If purchasing power parity holds, the price of a Big Mac in the U.S. should equal the price in Canada converted to U.S. dollars. At an exchange rate of 1.5 U.S. dollars per Canadian dollar, a Big Mac costing 2 Canadian dollars would cost 2 * 1.5 = 3 U.S. dollars.

If Purchasing Power Parity Holds and the Nominal Exchange Rate