Asked by
Urskin Winston
on Dec 17, 2024
Verified
Suppose a Starbucks tall latte costs $4.00 in the United States and 2.50 euros in the Euro area. Also, suppose a McDonald's Big Mac costs $4.50 in the United States and 3.60 euros in the Euro area. If the nominal exchange rate is 0.80 euros per dollar, which goods have prices that are consistent with purchasing-power parity?
A) Both the tall latte and the Big Mac
B) The tall latte but not the Big Mac
C) The Big Mac but not the tall latte
D) Neither the Big Mac nor the tall latte
Purchasing-Power Parity
An economic theory that compares different countries' currencies through a "basket of goods" approach to assess the relative value of currencies.
Nominal Exchange Rate
How quickly one currency is swapped for another, without considering inflation adjustments.
Big Mac
A hamburger sold by McDonald's that is often used as an informal measure of purchasing power parity between currencies.
- Comprehend the effect of exchange rates on international commerce and the cost of goods.
- Become familiar with the principle of purchasing-power parity and its irregularities.
Verified Answer
GC
Learning Objectives
- Comprehend the effect of exchange rates on international commerce and the cost of goods.
- Become familiar with the principle of purchasing-power parity and its irregularities.