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

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The "Big Mac Theory of Exchange Rates" tests the accuracy of purchasing power parity theory.In July 2013,the Economist reported that the average price of a Big Mac in the United States was $4.56.In Mexico,the average price of a Big Mac at that time was 37 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.


Definitions:

Mudflow Deposits

Sediments left behind by rapid flows of mud, often triggered by heavy rain or volcanic eruptions, that contain a mix of water and fine materials.

Pyroclastic Flow

A fast-moving current of hot gas and volcanic materials (lava blocks, pumice, ash) that flows down from a volcano during an explosive eruption.

High-Viscosity

A physical property indicating a fluid's resistance to flow, with higher values meaning greater resistance.

Nonwelded Tuff

A type of volcanic ash deposit that has not been compacted and lithified into a solid rock.

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