Suppose the price of a Big Mac in New York is $3.00 and the price of a Big Mac in Paris is $3.75 at the prevailing euro/dollar exchange rate,then according to PPP the euro is:

Question

Quizplus · Accepted Answer

PPP (purchasing power parity) theory states that exchange rates should adjust to equalize the price of an identical basket of goods and services in two different countries. In this case, the price of a Big Mac is higher in Paris ($3.75) than in New York ($3.00), which means that the euro is overvalued relative to the dollar. Specifically, it is overvalued by (3.75 - 3)/3 = 0.25 or 25%.

Suppose the Price of a Big Mac in New York