One Friday a Few Years Ago, the Big Mac Index

question 45

Multiple Choice

One Friday a few years ago, the Big Mac Index suggested that the yen was overvalued relative to the dollar by 70%.When currency markets opened on the following Monday, anyone using the Big Mac Index would conclude that yen was only 20% overvalued relative to the dollar.What is the most likely explanation for this?

• A)Japan's Central Bank acted to prop up the yen.
• B)Inflation in Japan suddenly spiked upward.
• C)McDonald's headquarters stopped hedging.
• D)McDonald's Japan reduced the yen price of a Big Mac.
• E)McDonald's Japan increased the yen price of a Big Mac.

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Definitions:

Market Price

The current value at which a good or service can be bought or sold in a marketplace, determined by the forces of supply and demand.

Perfect Price Discrimination

Perfect price discrimination occurs when a seller charges every consumer the maximum they are willing to pay, capturing the entire consumer surplus as profit.

Marginal Revenue

The additional revenue that a company gains by selling one more unit of a product or service.

Demand Curve

A graph showing the relationship between the price of a good and the quantity demanded, typically downward sloping.