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

question 34

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 Canada was $4.07.In Switzerland, the average price of a Big Mac was 6.50 Swiss francs.If the exchange rate between the Canadian dollar and the Swiss franc was 0.93 Swiss francs per Canadian dollar, how would purchasing power parity predict the exchange rate would change in the long run? Support your answer graphically.

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Definitions:

Proteins

are large, complex molecules made up of amino acids that play many critical roles in the body, including catalyzing metabolic reactions, DNA replication, responding to stimuli, and transporting molecules from one location to another.

Cytoplasm

The gel-like substance within a cell, excluding the nucleus, containing organelles and is involved in numerous cellular processes.

Plane

A flat, two-dimensional surface that extends infinitely in all directions.

Body's Organs

Groups of tissues in a living organism that have been adapted to perform a specific function or group of functions.