The average price of a Big Mac hamburger at McDonald’s restaurants in the United States is US$2.71, while in Britain, it sells for £1.99. The current exchange rate is £0.63 (that is, 63 pence) to the dollar. Using the Big Mac as the “basket” to estimate the purchasing power parity exchange rate, is the pound over or undervalued. What would you predict about the movement of that exchange rate?

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Purchasing Power Parity Cost of big mac x Currency 1 Cost of good x currency 2 199 ... View the full answer