A Big Mac costs $3 in the United States and 2 euros in Spain. The purchasing power parity theory would predict that the exchange rate in the long run is

Question

Quizplus · Accepted Answer

The purchasing power parity theory states that the exchange rate between two currencies should be equal to the ratio of the prices of a basket of goods in the two countries. In this case, the basket of goods consists of a Big Mac. In the United States, a Big Mac costs $3, and in Spain, it costs 2 euros. Therefore, the exchange rate should be $1 = 0.67 euro.

A Big Mac Costs $3 in the United States and 2