If purchasing power parity holds and the nominal exchange rate is £1 for $2,then a Big Mac that costs £2 in London should cost $4 in New York.

Question

Quizplus · Accepted Answer

Purchasing power parity (PPP) is a theory that suggests that exchange rates should adjust to equalize the prices of goods and services in different countries. In this case, if the nominal exchange rate is £1 for $2, and a Big Mac costs £2 in London, then according to PPP, the same Big Mac should cost $4 in New York. Therefore, the statement is true, and the answer is A.

If Purchasing Power Parity Holds and the Nominal Exchange Rate