If a Big Mac costs $3.41 in the United States and $2.67 in Argentina (the price of a Big Mac in Argentine pesos converted into dollars at the spot exchange rate), which of the following is most likely true?
A)The peso is overvalued against the dollar.
B)The dollar is overvalued against the peso.
C)It should be harder for a U.S. tourist to buy a leather coat in Buenos Aires because the dollar won't go very far.
D)It will be cheap for Argentine companies to invest in the United States because the dollar is relatively weak.

Question

Quizplus · Accepted Answer

The fact that the Big Mac is cheaper in Argentina than in the United States suggests that the Argentine peso is undervalued compared to the dollar. This means that the dollar can buy more pesos than it should be able to based on the relative purchasing power of the two currencies. Therefore, choice B – the dollar is overvalued against the peso – is the most likely explanation. Choices A, C, and D can be ruled out based on this reasoning.

If a Big Mac Costs $3