Suppose a McDonalds Big Mac cost $4.40 in the United States and 3.30 euros in the euro area and 5.72 Australian dollars in Australia. If exchange rates are .75 euros per dollar and 1.3 Australian dollars per dollar, where does purchasing-power parity hold?
A) both the euro area and Australia
B) the euro area but not Australia
C) Australia but not the euro area
D) neither the euro area nor Australia

Question

Quizplus · Accepted Answer

Purchasing-power parity holds in the euro area because the price of a Big Mac in euros (3.30) is equal to the price of a Big Mac in dollars (4.40) multiplied by the exchange rate (0.75). Purchasing-power parity also holds in Australia because the price of a Big Mac in Australian dollars (5.72) is equal to the price of a Big Mac in dollars (4.40) multiplied by the exchange rate (1.3).

Suppose a McDonalds Big Mac Cost $4