Suppose the Price of a Big Mac in New York

question 14

Multiple Choice

Suppose the price of a Big Mac in New York is $3.00 and the price of a Big Mac in Paris is equivalent to $3.75 at the prevailing euro/dollar exchange rate. Using the concept of purchasing power parity, the euro is

• A) undervalued by 25 percent against the dollar.
• B) overvalued by 25 percent against the dollar.
• C) appreciating relative to the dollar.
• D) depreciating relative to the dollar.

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Definitions:

Government Spending

Expenditures by the government sector on goods and services, including public services and government investment, but excluding transfer payments.

Price Index

A statistical measure that shows changes in the price level of a basket of goods and services over time, used to gauge inflation.

Phillips Curve

An economic theory suggesting an inverse relationship between the rate of unemployment and the rate of inflation in an economy.

Inflation

A continuous rise in the overall price level of goods and services within an economy over a period.