If a Big Mac hamburger sells for the same dollar value in New York as in London then ?
Correct answer: D. purchasing power parity holds
- A. the inflation rate in each country will necessarily equal zero
- B. the inflation rate in each country will necessarily equal 1 percent
- C. the exchange rates are said to be fixed pegged to each other
- D. purchasing power parity holds
Explanation
When an identical tradable product has the same value after currency conversion, the exchange rate equalizes purchasing power between the two locations. This is the basic idea of purchasing power parity, not a statement about inflation being zero or exchange rates being fixed.
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The economy is studied as a whole through national income, gross domestic product, inflation, unemployment, economic growth and business cycles. Coverage includes aggregate demand and supply, consumption and investment, money and banking, fiscal and monetary policy, exchange rates and balance of payments, which distinguishes macroeconomics from the study of individual markets.
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