Suppose a Big Mac costs $4.20 in Canada and 9.55 zlotys in Poland.If the exchange rate is 2.77 zlotys per dollar,purchasing power parity predicts that
A) the dollar is undervalued.
B) the zloty is undervalued.
C) the zloty is overvalued.
D) both the dollar and the zloty are undervalued.

Question

Quizplus · Accepted Answer

Purchasing power parity suggests that the exchange rate should equalize the price of identical goods in different countries. At 2.77 zlotys per dollar, a Big Mac should cost 4.20 * 2.77 = 11.634 zlotys in Poland. Since it costs only 9.55 zlotys, the zloty is undervalued.

Suppose a Big Mac Costs $4