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January 2025 that is compatible with ppp

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Reference no: EM133711084

Question: The January 2024 Big Mac Index, published by The Economist, contains the following information: Country Big Mac price Spot exchange rate United States USD 5.69 Australia AUD 7.70 1.52 (AUD/USD) a) Does Purchasing Power Parity (PPP) relationship (absolute version) hold based on the above information? b) Is the Australian dollar (AUD) overvalued or undervalued against the US dollar? Calculate the percentage that the AUD is over/under valued. c) What would be the spot exchange rate S(AUD/USD) in January 2024 that is compatible with Purchasing Power Parity (PPP)? Assume that the Big Mac price in the United States increases by 4% per year while that in Australia increases by 5% per year, what would be the spot exchange rate S(AUD/USD) in January 2025 that is compatible with PPP?

Reference no: EM133711084

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