According to purchasing-power parity theory, if a McDonald's Big Mac cost U.S. $2.50 in the United States and 10 Tunisian dinars, what should the exchange rate be?
A)1/4 Tunisian dinars per U.S. dollar
B)1 Tunisian dinar per U.S. dollar
C)4 Tunisian dinars per U.S. dollar
D)25 Tunisian dinars per U.S. dollar

Question

Quizplus · Accepted Answer

According to purchasing-power parity theory, the exchange rate should equalize the prices of identical goods (in this case, a Big Mac) in different countries. Therefore, if a Big Mac costs $2.50 in the U.S. and 10 Tunisian dinars in Tunisia, the exchange rate should be such that $2.50 is equal to 10 Tunisian dinars. This works out to be 4 Tunisian dinars per U.S. dollar.

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