A Big Mac costs $3 in the United States and 50 pesos in Mexico. The purchasing power parity theory would predict that the exchange rate in the long run is

Question

Quizplus · Accepted Answer

According to the purchasing power parity theory, exchange rates should adjust so that a basket of goods in one country costs the same in another country after accounting for the exchange rate. In this case, we can use the price of a Big Mac in the United States and Mexico to estimate the exchange rate. If a Big Mac costs $3 in the United States and 50 pesos in Mexico, then the exchange rate should be $1 = 16.67 pesos ($3 divided by 50 pesos). Therefore, the best choice is B.

A Big Mac Costs $3 in the United States and 50