What would the purchasing-power parity theory predict

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Reference no: EM13201756

In January, 2009 the price of a Big Mac hamburger was $3.543 in the United States and 12.5 yuan in China. Furthermore, the nominal foreign exchange rate was 6.84 yuan per dollar.

a. Calculate the real exchange rate

b. If the nominal prices of Big Macs remain unchanged in both countries, what would the purchasing-power parity theory predict would eventually be: The real exchange rate and the nominal exchange rate

In 2005, The economist reported that France's real exchange rate had increased relative to Germany's real exchange rate during the preceding two years. How can this be true if both France and Germany used the euro as their currency? Explain your answer using the formula for the real exchange rate and the percentage change rule.

Reference no: EM13201756

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