The Big Mac price is $4 in Britain and $6.6 in Switzerland.We then expect
A)the British currency to depreciate and the Swiss currency to appreciate.
B)the British currency to appreciate and the Swiss currency to depreciate.
C)the British and Swiss currencies both to depreciate.
D)the British and Swiss currencies both to appreciate.

Question

Quizplus · Accepted Answer

According to the theory of purchasing power parity, in the absence of trade barriers and transaction costs, the price of a Big Mac should be the same in every country in local currency terms. However, in this case, we observe that the price of a Big Mac is higher in Switzerland than in Britain, which suggests that the Swiss franc is overvalued relative to the British pound. Therefore, we expect the British currency to appreciate and the Swiss currency to depreciate to make the price of the Big Mac similar in both countries.

The Big Mac Price Is $4 in Britain and $6