Assume that a Big Mac burger costs $3.57 in Australia and 7.80 zlotys in Poland. If the exchange rate is 3 zlotys per dollar, purchasing power parity predicts that the dollar will:
A)appreciate as the demand for dollars rises in the long run.
B)appreciate as the supply of dollars falls in the long run.
C)depreciate as the demand for dollars falls in the long run.
D)depreciate as the supply of dollars rises in the long run.

Question

Quizplus · Accepted Answer

Purchasing power parity suggests that exchange rates should adjust to equalize the price of identical goods in different countries. Given the exchange rate, the Big Mac should cost 3.57 * 3 = 10.71 zlotys in Poland, but it costs only 7.80 zlotys. This implies the dollar is overvalued and should depreciate, leading to an increase in the supply of dollars.

Assume That a Big Mac Burger Costs $3