Purchasing power parity theory states that given relatively efficient markets, the price of a "basket of goods" should be Multiple Choice much less in industrialized countries. much less in third world countries. variable depending upon the current rate of exchange between the producer and consumer of the products in the "basket." roughly equivalent in each country. If the demand for dollars outstrips its supply and if the supply of Japanese yen is greater than the demand for it$,$ what will happen? Multiple Choice The dollar will appreciate against the yen. The dollar will depreciate against the yen. The exchange rates will remain the same. O The yen will appreciate against the dollar. Suppose the price of a Big Mac in New York is $$3\mathrm{.}00$ and the price of a Big Mac in Paris is equivalent to $$3\mathrm{.}75$ at the prevailing euro$/$dollar exchange rate. Using the concept of purchasing power parity, the euro is Multiple Choice undervalued by $25$ percent against the dollar, overvalued by $25$ percent against the dollar. appreciating relative to the dollar. depreciating relative to the dollar. Identify the correct statement about the PPP theory. Multiple Choice It predicts that exchange rates are determined by relative prices. It yields accurate predictions of short$-$run movements in exchange rates. It best predicts exchange rate changes for countries with low rates of inflation. It includes transportation costs and trade tariffs.