If a "Big Mac costs $4.00 in the United States and 200 yen in Japan, then the implied "purchasing-power-parity" exchange rate using the "Big Mac" is __________. If the actual exchange rate in the market is 120 yen = $1, then an economist would say that the actual Japanese yen is __________ in comparison with its "purchasing-power-parity" rate.

Question

Quizplus · Accepted Answer

50 yen; undervaluedThe implied purchasing-power-parity (PPP) exchange rate is calculated by dividing the cost of a Big Mac in Japan (200 yen) by the cost of a Big Mac in the United States ($4.00), which equals 50 yen per dollar. If the actual exchange rate is 120 yen = $1, this means you need more yen to buy a dollar than what the PPP suggests, indicating that the yen is undervalued compared to its PPP rate.

If a "Big Mac Costs $4