Question

If a McDonald's Big Mac costs $4.50 in the United States and 3.60 euros in the Euro area, then purchasing-power parity implies the nominal exchange rate is how many euros per dollar? A) 1.25 B) 1.50 C) 1.00 D) 0.80

Answer 1

Under the concept of purchasing-power parity, the nominal exchange rate between euros and dollars based on the price of a Big Mac would be 0.80 euros per dollar. Option D is correct.

Step-by-step explanation:

If a McDonald's Big Mac costs $4.50 in the United States and 3.60 euros in the Euro area, then purchasing-power parity (PPP) implies the nominal exchange rate is how many euros per dollar?

To find the PPP exchange rate, we divide the cost of a Big Mac in the Euro area by the cost of a Big Mac in the United States.

PPP exchange rate = cost of a Big Mac in the Euro area/ cost of a Big Mac in the United States.

Cost of a Big Mac = 3.60 euros

cost of a Big Mac in the United = $4.50

Substitute these values in to the formula:

PPP exchange rate = 3.60 euros / $4.50

= 0.80 euros per dollar.

Therefore, the correct answer is D) 0.80 euros per dollar.