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Considering Purchasing Power Parity and the Law of One Price: a. Assume that the current price of...

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Finance

Considering Purchasing Power Parity and the Law of OnePrice:

a. Assume that the current price of a Big Mac in the UnitedStates today is $2.75. Assume also that the current price of a BigMac in Malaysia is 6.5000 ringgits and that the current USDMYRexchange rate is 3.0250 ringgits per $. What is the implied PPP ofthe USD?

b. Using the assumptions above, what is the under (-) / over (+)valuation of Malaysian ringgits versus the U.S. dollar inpercentage terms?

c. What are the long-term implications associated with youranswer to part b.?

Answer & Explanation Solved by verified expert
4.4 Ratings (610 Votes)
According to purchase power parity the price of same commodityin two different countries should always remain    See Answer
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