According to purchasing-power parity theory, if a McDonald's Big Mac cost U.S. $2.50 in the United States and 5 euros in France, what should the nominal exchange rate be?
A)2 euros per U.S. dollar
B)1 euro per U.S. dollar
C)1/2 euro per U.S. dollar
D)1/4 euro per U.S. dollar

Question

Quizplus · Accepted Answer

According to purchasing-power parity, the nominal exchange rate should equal the ratio of the prices of the goods in the two countries. Therefore, 5 euros / $2.50 = 2 euros per U.S. dollar.

According to Purchasing-Power Parity Theory, If a McDonald's Big Mac