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Assume the BigMac is sold at US$5 in US and 3 Euro in Germany. Let's assume the current spot exchange rate is 1.21 US$/Euro. If we believe in th PPP theory, US$ should _____ against Euro. Group of answer choices appreciate depreciate

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jepessoa

Answer:

depreciate

Explanation:

Right now the relative value of the dollar is too high. If we follow the purchasing power parity theory, the value of the US dollar against the euro should be:

current spot rate x (domestic price / foreign price) = ($1.21 / 1€) x ($5 / 3€) = $6.05 / 3€ = $2.0167 per €

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