Recall Application 1, "The Chinese Yuan and Big Macs," to answer the following questions:
-According to the application, the actual dollar- yuan exchange rate was 6.8 yuan per U.S. dollar and the predicted purchasing power exchange rate (using the Big Mac) in China is 3.49 yuan. If the exchange rates were to adjust so that the Law of One Price were achieved, then the:

Question

Quizplus · Accepted Answer

If the exchange rates were to adjust so that the Law of One Price were achieved, it means that the actual exchange rate will move closer to the predicted purchasing power exchange rate (PPP). In this case, the PPP is lower than the actual exchange rate, which means that the yuan is overvalued. To achieve the Law of One Price, the yuan would need to appreciate (i.e., become closer to the PPP). Therefore, the correct answer is D.

Recall Application 1, "The Chinese Yuan and Big Macs," to Answer