The "Big Mac Theory of Exchange Rates" Tests the Accuracy

question 45

Essay

The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory.In July 2011,the Economist reported that the average price of a Big Mac in the United States was $4.07.In Mexico,the average price of a Big Mac at that time was 32 pesos.If the exchange rate between the dollar and the peso was 13.60 pesos per dollar,how would purchasing power parity predict the exchange rate will change in the long run? Support your answer graphically.

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Definitions:

Mites

Tiny arthropods, some of which are known to cause allergies or skin conditions in humans and animals.

Genital Candidiasis

A fungal infection caused by yeasts that belong to the genus Candida, affecting the genital area, commonly known as a yeast infection.

Yeast Infection

A fungal infection, often caused by Candida species, that can affect different parts of the body, such as the mouth, genitals, and skin, leading to various symptoms.

Hepatitis

A disease characterized by inflammation of the liver, caused by infections, toxic substances, or autoimmune diseases, and classified by types such as A, B, C, D, and E.