If the price of a Big Mac is identical in US dollars both in New York and London, what economic concept does this illustrate?

Multiple choice question for Exchange-Rate Determination. Select an option, then review the explanation below.

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Both countries must have zero inflation ratesEach country experiences exactly 1% inflationThe currencies are fixed and pegged to one anotherPurchasing power parity is satisfiedThe exchange rate is determined by market speculation

Explanation

When a Big Mac costs the same in New York and London after currency conversion, it indicates that purchasing power parity (PPP) holds, meaning that the exchange rate adjusts so that identical goods have equal prices across countries.

Practice related questions from the same subject.

1.If a Big Mac costs $3 in the United States and 2 pesos in Mexico, what is the implied purchasing power parity (PPP) exchange rate between the peso and the US dollar?
2.If Japan, with its high savings rate, invests capital overseas, how is the Japanese yen likely to be affected, and what impact would this have on Japan's trade balance?
3.If interest rates are the same on similar assets in the U.S. and abroad, and investors expect the U.S. dollar to weaken relative to foreign currencies in the future, where are investment funds most likely to move?
4.If a country's money demand equals its money supply and its balance of payments is initially balanced, which of the following changes would cause the balance of payments to shift into a surplus?
5.Which market expectation would lead to the U.S. dollar strengthening against the Japanese yen?

If the price of a Big Mac is identical in US dollars both in New York and London, what economic concept does this illustrate?

Explanation

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