When The Economist magazine runs articles using the Big Mac hamburger to value exchange rates, it is using the principle of
A) exchange arbitrage.
B) market expectations.
C) purchasing power parity.
D) interest rate parity.

Question

Quizplus · Accepted Answer

The principle of using the Big Mac hamburger to value exchange rates is based on purchasing power parity, which suggests that exchange rates should adjust to equalize the prices of a basket of goods (in this case, the Big Mac) across countries. This is because if one currency is overvalued relative to another, consumers will purchase more goods from the cheaper country, causing the exchange rate to adjust. Therefore, choice C is the best answer.

When the Economist Magazine Runs Articles Using the Big Mac