If a Big Mac costs C$3.00 in Canada and $2.31 in the USA, according to purchasing power parity, what is the implied exchange rate in C$/US$?

Question

Quizplus · Accepted Answer

According to purchasing power parity, the cost of the same good should be equivalent in different countries when measured using a common currency. Therefore, we can set up the equation: 3(Canadian dollars) = 2.31(US dollars). Solving for the exchange rate, we get 3/2.31 = 1.3793. This means that one Canadian dollar is equivalent to 1.3793 US dollars, or alternatively, one US dollar is equivalent to 0.725 Canadian dollars. The correct answer is therefore A.

If a Big Mac Costs C$3